<PAGE>
As filed with the Securities and Exchange Commission on October 4, 1999
REGISTRATION NOS. 33-44021; 811-6477
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- --------------------------------------------------------------------------------
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D. C. 20549
------------------------
FORM N-1A
REGISTRATION STATEMENT
UNDER
THE SECURITIES ACT OF 1933
POST-EFFECTIVE AMENDMENT NO. 14 /X/
AND/OR
REGISTRATION STATEMENT UNDER
THE INVESTMENT COMPANY ACT OF 1940
AMENDMENT NO. 14 /X/
[Check appropriate box or boxes.]
------------------------
SM&R INVESTMENTS, INC.
[Exact Name of Registrant as Specified in Charter]
2450 SOUTH SHORE BOULEVARD, SUITE 400, LEAGUE CITY, TEXAS 77573
[Address of Principal Executive Offices] [Zip Code]
Registrant's Telephone Number, Including Area Code (281) 334-2469
NAME AND ADDRESS OF
AGENT FOR SERVICE: WITH COPY TO:
TERESA E. AXELSON JERRY L. ADAMS
2450 SOUTH SHORE BOULEVARD, SUITE 400 GREER, HERZ & ADAMS, L.L.P.
LEAGUE CITY, TEXAS 77573 ONE MOODY PLAZA
GALVESTON, TEXAS 77550
It is proposed that this filing will become effective (check appropriate box):
/ / immediately upon filing pursuant to paragraph (b) of Rule 485
/ / on (date) pursuant to paragraph (b) of Rule 485
/ / 60 days after filing pursuant to paragraph (a)(1) of Rule 485
/X/ on December 31, 1999 pursuant to paragraph (a)(1) of Rule 485
/ / 75 days after filing pursuant to paragraph (a)(2) Rule 485
/ / on (date) pursuant to paragraph (a)(2) of Rule 485
If appropriate, check the following box:
/ / this Post-Effective Amendment designates a new effective date for a
previously filed Post-Effective Amendment.
Title of Securities Being Registered: Common Stock, par value $.01 per share.
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<PAGE>
[LOGO]
SM&R INVESTMENTS, INC.
FIXED INCOME FUNDS
INVESTMENT STRATEGIES FOR A CHANGING WORLD
CLASS A, CLASS B, CLASS C FUNDS
SM&R GOVERNMENT BOND FUND
SM&R TAX FREE FUND
SINGLE CLASS FUNDS
SM&R PRIMARY FUND
SM&R MONEY MARKET FUND
Prospectus, December 31, 1999
The Securities and Exchange Commission has not approved or
disapproved these securities or passed upon the adequacy of this
prospectus. Any representation to the contrary is a criminal
offense.
<PAGE>
TABLE OF CONTENTS
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<TABLE>
<S> <C>
FUND PROFILES.............................. 1
SM&R Government Bond Fund.................. 1
SM&R Tax Free Fund......................... 2
SM&R Primary Fund.......................... 3
SM&R Money Market Fund..................... 4
OVERVIEW OF COMMON RISK FACTORS............ 5
PERFORMANCE................................ 6
Bar Charts and Performance Tables.......... 6
EXPENSES OF THE FUNDS...................... 9
Fees and Expenses of the Funds............. 9
CHOOSING A SHARE CLASS THAT BEST SUITS
YOU........................................ 11
SALES CHARGE REDUCTIONS AND WAIVERS........ 12
Class A Sales Charges...................... 12
Class B Sales Charges...................... 13
Class B Waivers of Contingent Deferred
Sales Charges.............................. 13
Class C Sales Charges...................... 14
Distribution and Shareholder
Service (12b-1) Fee........................ 14
INVESTMENT OBJECTIVES AND POLICIES ........ 15
Government Bond Fund....................... 15
Tax Free Fund.............................. 17
Primary Fund............................... 19
Money Market Fund.......................... 19
OTHER RISK FACTORS......................... 21
THE FUNDS AND THEIR MANAGEMENT............. 22
Investment Advisor......................... 22
Portfolio Management....................... 23
FINANCIAL HIGHLIGHTS....................... 24
Government Bond Fund....................... 25
Tax Free Fund.............................. 26
Primary Fund............................... 27
Money Market Fund.......................... 28
SHAREHOLDER'S GUIDE TO INVESTING WITH
SM&R'S MUTUAL FUNDS........................ 29
APPENDIX................................... A-1
</TABLE>
WHY READING THIS PROSPECTUS IS IMPORTANT TO YOU
This prospectus explains the investment objectives, risks and strategies of
each of the SM&R Mutual Funds. Reading the prospectus will help you to decide
which SM&R Mutual Fund, if any, is the right investment for you. We suggest
that you keep this prospectus for future reference.
<PAGE>
FUND PROFILE SM&R GOVERNMENT BOND FUND
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FUND FACTS
YOU MAY FIND
HELPFUL
Classes of Shares
Offered in this
Prospectus:
Class A-Fund #126
Class B-Fund #226
Class C-Fund #326
Investment Adviser:
Securities
Management and
Research, Inc.
Portfolio Manager:
Terry E. Frank
Portfolio Turnover:
Class A
Class B
Class C
NASDAQ Symbols:
Class A
Class B
Class C
Dividend Payment
Schedule:
Monthly
Refer to the
"Overview of
Common Risk
Factors" on page 5
for a more detailed
explanation of the principal risk factors.
INVESTMENT OBJECTIVE
To provide as high a level of current income, liquidity, and safety of principal
as is consistent with prudent investment risks through investment in a portfolio
consisting primarily of securities issued or guaranteed by the U.S. Government,
its agencies, or instrumentalities.
PRINCIPAL INVESTMENT STRATEGIES
The Government Bond Fund normally invests at least 65% of its assets in
securities issued or guaranteed by the U.S. Government, its agencies, or
instrumentalities. These may include Treasuries and mortgage-backed securities,
such as Ginnie Maes, Freddie Macs, and Fannie Maes. This fund may also invest
assets in collateralized mortgage obligations.
The Government Bond Fund may invest in zero coupon bonds, which are U.S.
Government obligations. The fund may also invest in commercial paper,
certificates of deposit, corporate debt securities rated "A" or higher, and
repurchase agreements.
The Government Bond Fund generally invests primarily in medium and long term
securities. The average portfolio maturity generally is expected to be in the
six to fifteen year range (some securities may have longer or shorter
durations). The average portfolio maturity may be shorter when management
anticipates that interest rates will increase, and longer when management
anticipates that interest rates will decrease.
PRINCIPAL RISK FACTORS
You could lose money on your investment in the Government Bond Fund, or it could
underperform other investments. The Government Bond Fund is subject to the
following principal risks.
- Interest Rate Risk
- Investment Style or Management Risk
- Market Risk
- Prepayment and Extension Risk
WHO MAY WANT TO INVEST IN THE FUND
The Government Bond Fund may be appropriate if you:
- are seeking a regular stream of income to meet current needs
- are seeking higher potential returns than money market funds and are willing
to accept moderate risk of volatility
- are retired or nearing retirement
The Government Bond Fund may NOT be appropriate if you:
- are investing for maximum return over a long time horizon
- require absolute stability of your principal
1
<PAGE>
FUND PROFILE SM&R TAX FREE FUND
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FUND FACTS
YOU MAY FIND
HELPFUL
Classes of Shares
Offered in this
Prospectus:
Class A-Fund #128
Class B-Fund #228
Class C-Fund #328
Investment Adviser:
Securities
Management and
Research, Inc.
Portfolio Manager:
Terry E. Frank
Portfolio Turnover:
Class A
Class B
Class C
NASDAQ Symbols:
Class A
Class B
Class C
Dividend Payment
Schedule:
Monthly
Refer to the
"Overview of
Common Risk
Factors" on page 5
for a more detailed
explanation of the principal risk factors.
INVESTMENT OBJECTIVE
To provide as high a level of interest income largely exempt from federal income
taxes as is consistent with preservation of capital through investment of at
least 80% of its net assets in tax-exempt securities during normal market
conditions.
PRINCIPAL INVESTMENT STRATEGIES
The Tax Free Fund invests primarily in tax-exempt securities. During normal
market conditions, this fund invests at least 80% of its assets in municipal
securities that pay interest exempt from federal income taxes. The Tax Free Fund
generally invests in securities rated Baa or better by Moody's or BBB or better
by Standard and Poor's and Fitch. This fund may not invest more than 20% of its
assets in UNRATED municipal securities. These securities may be less liquid than
comparably rated municipal securities and involve somewhat greater risk. This
fund may also invest up to 20% of its assets in Government guaranteed taxable
bonds, highly rated corporate bonds, or commercial paper.
The average portfolio maturity of the Tax Free Fund generally is expected to be
in the six to twelve year range (some securities have longer or shorter
durations). The average portfolio maturity may be shorter when management
anticipates that interest rates will increase, and longer when management
anticipates that interest rates will decrease.
PRINCIPAL RISK FACTORS
You could lose money on your investment in the Tax Free Fund, or it could
underperform other investments. The Tax Free Fund is subject to the following
principal risks.
- Interest Rate Risk
- Credit Risk
- Liquidity Risk
- Investment Style or Management Risk
- Market Risk
ALSO, SOME OF YOUR DIVIDEND INCOME MAY BE TAXABLE.
WHO MAY WANT TO INVEST IN THE FUND
The Tax Free Fund may be appropriate if you:
- are willing to sacrifice some investment return for income exempt from
federal income tax and, under certain conditions, exempt from state and
local taxes
- are in a high tax bracket (28% and up)
- are seeking a regular stream of income to meet current needs
- are seeking higher potential returns than money market funds and are willing
to accept moderate risk of volatility
The Tax Free Fund may NOT be appropriate if you:
- are investing for maximum return
- require absolute stability of your principal
- prefer capital gains over ordinary income
2
<PAGE>
FUND PROFILE SM&R PRIMARY FUND
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FUND FACTS
YOU MAY FIND
HELPFUL
Single Class:
Fund #627
Investment Adviser:
Securities
Management and
Research, Inc.
Portfolio Managers:
Terry E. Frank
John S. Maidlow
NASDAQ Symbol:
Dividend Payment
Schedule:
Monthly
Refer to the
"Overview of
Common Risk
Factors" on page 5
for a more detailed
explanation of the principal risk factors.
INVESTMENT OBJECTIVE
To seek maximum current income consistent with capital preservation and
liquidity through investment primarily in commercial paper.
PRINCIPAL INVESTMENT STRATEGIES
The Primary Fund invests primarily in commercial paper. Commercial paper is
short-term unsecured promissory notes issued by corporations. This fund will
only invest in commercial paper rated in one of the two highest rating
categories.
The Primary Fund may also invest in:
- U.S. Government obligations;
- corporate debt obligations maturing in five years or less and rated "A" or
higher;
- certificates of deposit, generally maturing in 3 years or less; and
- repurchase agreements.
PRINCIPAL RISK FACTORS
You could lose money on your investment in the Primary Fund, or it could
underperform other investments. The Primary Fund is subject to the following
principal risks.
- Interest Rate Risk
- Credit Risk
- Investment Style or Management Risk
- Market Risk
By limiting its investments as described above, the Primary Fund may not achieve
as high a level of current income as a fund investing in lower-rated securities
or longer-term securities.
WHO MAY WANT TO INVEST IN THE FUND
The Primary Fund may be appropriate if you:
- are seeking a regular stream of income to meet current needs
- are seeking higher potential returns than money market funds and are willing
to accept moderate risk of volatility
- are more concerned with safety of principal than with investment returns
- are retired or nearing retirement
The Primary Fund may NOT be appropriate if you:
- are investing for maximum return
- require absolute stability of your principal
- are investing for goals that are many years in the future
- prefer capital gains over ordinary income
3
<PAGE>
FUND PROFILE SM&R MONEY MARKET FUND
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FUND FACTS
YOU MAY FIND
HELPFUL
Single Class:
Fund #620
Investment Adviser:
Securities
Management and
Research, Inc.
Portfolio Managers:
Terry E. Frank
John S. Maidlow
NASDAQ Symbol:
Dividend Payment
Schedule:
Monthly
Refer to the
"Overview of
Common Risk
Factors" on page 5
for a more detailed
explanation of the principal risk factors.
INVESTMENT OBJECTIVE
To seek the highest current income consistent with the stability of principal
and maintenance of liquidity.
PRINCIPAL INVESTMENT STRATEGIES
The Money Market Fund seeks to achieve its objective by investing in
high-quality short-term money market instruments, including: U.S. Government
obligations, certificates of deposit, banker's acceptances, commercial paper,
collateralized mortgage obligations, and corporate bonds and notes. This fund
limits its investments to those short-term securities that it determines present
minimal credit risk and meet certain rating requirements (in the two highest
short-term rating categories).
PRINCIPAL RISK FACTORS
The Fund is subject to the following risks:
- Interest Rate Risk
- Credit Risk
- Liquidity Risk
- Investment Style or Management Risk
However, the risks of investment in the Money Market Fund may be expected to be
less than for other mutual funds. By limiting its investments as described
above, this fund may not achieve as high a level of current income as a fund
investing in lower-rated securities. ALTHOUGH THE MONEY MARKET FUND SEEKS TO
PRESERVE THE VALUE OF YOUR INVESTMENT AT $1.00 PER SHARE, IT IS POSSIBLE TO LOSE
MONEY BY INVESTING IN THE MONEY MARKET FUND. YOU SHOULD KEEP IN MIND THAT AN
INVESTMENT IN THE MONEY MARKET FUND IS NOT INSURED OR GUARANTEED BY THE FEDERAL
DEPOSIT INSURANCE CORPORATION OR ANY OTHER GOVERNMENT AGENCY.
WHO MAY WANT TO INVEST IN THE FUND
The Money Market Fund may be appropriate if you:
- require stability of principal
- are seeking a mutual fund for the cash portion of an asset allocation
program
- need to "park" your money temporarily
- are more concerned with safety of principal than with investment returns
- are investing emergency reserves
The Money Market Fund may NOT be appropriate if you:
- want federal deposit insurance
- are seeking an investment that is likely to outpace inflation
- are investing for retirement or other goals that are many years in the
future
- are investing for growth or maximum current income
4
<PAGE>
OVERVIEW OF COMMON RISK FACTORS
--------------------------------------------------------------------------
COMMON RISK FACTORS FOR
ALL OF SM&R'S MUTUAL FUNDS
Please remember that mutual fund shares are:
- - Not guaranteed to achieve their investment goal
- - Not insured, endorsed or guaranteed by the FDIC, a bank or any government
agency
- - Subject to investment risks, including possible loss of your original
investment
Like most investments, your investment in an SM&R Mutual Fund could fluctuate in
value over time and could result in a loss of money.
- --------------------------------------------------------
RISK FACTORS SPECIFIC TO THE
SM&R MUTUAL FUNDS
IMPORTANT
The following factors may affect the value of your investment in one or more
of the SM&R Mutual Funds.
CREDIT RISK
The risk that the issuer of a security, or a party to a contract, will
default or otherwise not honor a financial obligation. THIS RISK PRIMARILY
AFFECTS THE TAX FREE, PRIMARY AND MONEY MARKET FUNDS.
INTEREST RATE RISK
The risk of declines in market value of an income-bearing investment due to
changes in prevailing interest rates. With fixed-rate securities, a rise in
interest rates typically causes a decline in market values, while a fall in
interest rates typically causes an increase in market values. THIS RISK
AFFECTS ALL FOUR FUNDS, BUT HAS LESS AFFECT ON THE MONEY MARKET AND PRIMARY
FUNDS.
LIQUIDITY RISK
The risk that certain securities or other investments may be difficult or
impossible to sell at the time the fund would like to sell them or at the
price the fund values them. The fund may have to sell at a lower price, sell
other securities instead, or forego an investment opportunity, any of which
could have a negative effect on fund management or performance. THIS RISK
PRIMARILY AFFECTS THE TAX FREE, PRIMARY AND MONEY MARKET FUNDS.
INVESTMENT STYLE OR MANAGEMENT RISK
The risk that a strategy used by a fund's management may fail to produce the
intended result. THIS RISK AFFECTS ALL FOUR FUNDS.
MARKET RISK
The risk that the market value of a security may move up and down, sometimes
rapidly and unpredictably. The fluctuations may cause a security to be worth
less than the price originally paid for it, or less than it was worth at an
earlier time. Market risk may affect a single issuer, industry,
sector of the economy, or the market as a whole. This risk is common to all
stocks and bonds and the mutual funds that invest in them. THIS RISK AFFECTS
ALL FOUR FUNDS.
PREPAYMENT AND EXTENSION RISK
PREPAYMENT RISK is the risk that an unexpected fall in prevailing interest
rates will shorten the life of an outstanding mortgage-backed security by
increasing the actual or expected number of mortgage prepayments, thereby
reducing the security's value. EXTENSION RISK is the risk that an unexpected
rise in prevailing interest rates will extend the life of an outstanding
mortgage-backed security by reducing the actual or expected number of
mortgage prepayments, thereby reducing the security's value. THIS RISK
APPLIES ONLY TO THE GOVERNMENT BOND FUND.
OTHER RISKS
Each investor will be subject to all the risks normally attendant to business
operations, changes in general economic conditions, governmental rules and
fiscal policies, acts of God, and other factors beyond the control of the
funds management.
YEAR 2000 RISKS
Many services provided to the funds and their shareholders depend on the
smooth functioning of computer systems. Many computer software systems in use
today cannot distinguish the year 2000 from the year 1900 because of the way
the dates are encoded and calculated, referred to as the Year 2000 Problem.
The Year 2000 Problem could have a negative impact on handling securities
trades, payment of interest and dividends, pricing, and account services.
Like other mutual funds, financial and business organizations, and
individuals around the world, the funds could be adversely affected if the
computer systems used by SM&R (which acts as their investment adviser,
underwriter, custodian, and transfer agent) do not properly process and
calculate date-related information and data from and after January 1, 2000.
SM&R is taking steps to address the Year 2000 Problem with respect to the
computer systems that it uses and to obtain assurances that comparable steps
are being taken by any other service providers. At this time, however, there
can be no assurance that these steps will be sufficient to avoid any adverse
impact on the funds and their shareholders.
5
<PAGE>
PERFORMANCE
--------------------------------------------------------------------------
PERFORMANCE
The bar charts and average annual total return tables shown below provide some
indication of the risks of investing in the funds and the difference in returns
by:
- - showing performance for each year since inception and
- - showing how average annual returns compare to those of a broad measure of
market performance.
PAST PERFORMANCE IS NOT NECESSARILY
AN INDICATION OF HOW THE FUNDS
WILL PERFORM IN THE FUTURE.
The returns shown in the charts below show the percentage gain or loss for Class
A shares of the Funds since the Class A share inception on 1/1/99. These graphs
include the effects of Fund expenses, but not sales charges and 12b-1 fees. The
returns shown would be lower if such sales charges were included.
GOVERNMENT BOND FUND
A bar chart for Classes A, B or C of the Government Bond Fund is not included at
this time, as these classes began on 1/1/99 and have not been in existence for a
full calendar year.
The following table lists the Government Bond Fund's average annual total return
for Classes A, B and C since inception (1/1/99), including sales charges. This
table is intended to provide you with some indication of the risks of investing
in the Fund. At the bottom of the table you can compare this performance with
the Lehman Brothers Government/Mortgage-Backed Securities Index. This index
includes all public obligations of the U.S. treasury and all publicly issued
debt of U.S. Government agencies, quasi-federal corporations and corporate debt
guaranteed by the U.S. Government as well as 15 and 30 year fixed rate
securities backed by mortgage pools of the GNMA, FHLMA, and FNMA.
AVERAGE ANNUAL TOTAL RETURNS
(for the period ended 8/31/99)
<TABLE>
<CAPTION>
INCEPTION PAST PAST PAST SINCE
DATE 1 YEAR 5 YEARS 10 YEARS INCEPTION
<S> <C> <C> <C> <C> <C>
Class A 1/1/99 N/A N/A N/A
Class B 1/1/99 N/A N/A N/A
Class C 1/1/99 N/A N/A N/A
Lehman Brothers
Government/
Mortgage-Backed
Securities Index
</TABLE>
6
<PAGE>
PERFORMANCE
--------------------------------------------------------------------------
TAX FREE FUND
A bar chart for Classes A, B or C of the Tax Free Fund is not included at this
time, as these classes began on 1/1/99 and have not been in existence for a full
calendar year.
The following table lists the Tax Free Fund's average annual total return for
Classes A, B and C since inception (1/1/99), including sales charges. This table
is intended to provide you with some indication of the risks of investing in the
Fund. At the bottom of the table you can compare this performance with the
Lehman Brothers Municipal Index. This is an index of investment grade tax exempt
bonds classified into four major sections: General Obligations, Revenue, Insured
and Preferred.
AVERAGE ANNUAL TOTAL RETURNS
(for the period ended 8/31/99)
<TABLE>
<CAPTION>
INCEPTION PAST PAST PAST SINCE
DATE 1 YEAR 5 YEARS 10 YEARS INCEPTION
<S> <C> <C> <C> <C> <C>
Class A 1/1/99 N/A N/A N/A
Class B 1/1/99 N/A N/A N/A
Class C 1/1/99 N/A N/A N/A
Lehman Brothers Municipal
Index
</TABLE>
PRIMARY FUND
The chart below shows the percentage gain or loss for the Primary Fund in each
calendar since the Fund's inception on 3/16/92. It should give you a general
idea of how the Fund's return has varied from year to year. This graph includes
the effect of Fund expenses.
YEAR-BY-YEAR TOTAL RETURN
(for the period ended 12/31/98)
EDGAR REPRESENTATION OF DATA POINTS USED IN PRINTED GRAPHIC
<TABLE>
<S> <C>
1993 2.48%
1994 3.58%
1995 5.26%
1996 4.92%
1997 5.08%
1998
</TABLE>
<TABLE>
<CAPTION>
QUARTER ENDED TOTAL RETURN
<S> <C> <C>
Best Quarter:
Worst Quarter:
</TABLE>
The next table lists the Primary Fund's average year-by-year return over the
past one and five year periods and since inception, including sales charges.
This table is intended to provide you with some indication of the risks of
investing in the Fund. At the bottom of the table you can compare this
performance with the Lehman Government/Corporate Index.
This index represents all public obligations of the U.S. Treasury as well as all
publicly issued debt of U.S. Government agencies with maturities of one to three
years.
AVERAGE ANNUAL TOTAL RETURN
(for the period ended 12/31/98)
<TABLE>
<CAPTION>
INCEPTION PAST PAST PAST SINCE
DATE 1 YEAR 5 YEARS 10 YEARS INCEPTION
<S> <C> <C> <C> <C> <C>
Primary Fund
Lehman Government/
Corporate Index
</TABLE>
7
<PAGE>
PERFORMANCE
--------------------------------------------------------------------------
MONEY MARKET FUND
A bar chart for the Money Market Fund is not included at this time, as the Fund
did not begin operation until 1/1/99 and has not been in existence for a full
calendar year.
The following table lists the Money Market Fund's average return since inception
(1/1/99) and the Fund's 7-day current yield. At the bottom of the table you can
compare this performance with the ????? Index. This index represents ????
AVERAGE ANNUAL TOTAL RETURN
(for the period ended 8/31/99)
<TABLE>
<CAPTION>
INCEPTION PAST PAST PAST SINCE 7-DAY
DATE 1 YEAR 5 YEARS 10 YEARS INCEPTION YIELD
<S> <C> <C> <C> <C> <C> <C>
Money Market Fund 1/1/99 N/A N/A N/A
???? Index
</TABLE>
8
<PAGE>
EXPENSES OF THE FUNDS
--------------------------------------------------------------------------
FEES AND EXPENSES OF THE FUNDS
This table describes the fees and expenses that you may pay if you buy and hold
shares of the funds.
SHAREHOLDER FEES
(fees paid directly from your investment)
<TABLE>
<CAPTION>
GOVERNMENT BOND FUND PRIMARY
CLASS A CLASS B CLASS C FUND
<S> <C> <C> <C> <C>
MAXIMUM SALES CHARGE (TOTAL) 4.75% 3.00% 2.00% None
Maximum Sales Charge Imposed
on Purchases
(as a percentage of offering
price) 4.75%(1) None 1.00% None
Maximum Deferred Sales Charge
(as a percentage of offering
price)(2) None(3) 3.00%(4) 1.00%(5) None
Maximum Sales Charge Imposed
on Reinvested Dividends and
Other Distributions
(as a percentage of offering
price) None None None None
EXCHANGE FEES None None None None
</TABLE>
<TABLE>
<CAPTION>
MONEY
TAX FREE FUND MARKET
CLASS A CLASS B CLASS C FUND
<S> <C> <C> <C> <C>
MAXIMUM SALES CHARGE (TOTAL) 4.75% 3.00% 2.00% None
Maximum Sales Charge Imposed
on Purchases
(as a percentage of offering
price) 4.75%(1) None 1.00% None
Maximum Deferred Sales Charge
(as a percentage of offering
price)(2) None(3) 3.00%(4) 1.00%(5) None
Maximum Sales Charge Imposed
on Reinvested Dividends and
Other Distributions
(as a Percentage of offering
price) None None None None
EXCHANGE FEES None None None None
</TABLE>
(1) You pay a sales charge of 4.75% on initial investments in Class A shares of
less than $50,000. You pay a reduced sales charge at certain breakpoints,
as follows:
- 4.50% on initial investments of at least $50,000 but less than $100,000
- 3.50% on initial investments of at least $100,000 but less than $250,000
- 2.50% on initial investments of at least $250,000 but less than $500,000
- 1.50% on initial investments of at least $500,000 but less than $1 million
- zero on initial investments of $1 million or more
(2) You pay an $10.00 transaction fee for each expedited wire redemption.
(3) Purchases of $1 million or more of Class A shares may be made without an
initial sales charge. Redemptions of such shares within the first thirteen
months after purchase, however, will be subject to a contingent deferred
sales charge of 1.00%.
(4) The maximum 3.00% contingent deferred sales charge on Class B shares
applies to redemptions during the first year after purchase. The charge
declines to 2.00% during the second year, 1.00% during the third year, and
zero during the fourth year and thereafter.
(5) A contingent deferred sales charge of 1.00% only applies to redemptions of
Class C shares during the first thirteen months after purchase.
ANNUAL FUND OPERATING EXPENSES(6)
(expenses that are deducted from fund assets)
<TABLE>
<CAPTION>
GOVERNMENT BOND FUND PRIMARY
CLASS A CLASS B CLASS C FUND
<S> <C> <C> <C> <C>
Management Fees 0.50% 0.50% 0.50% 0.50%
Distribution and/or Service
(12b-1) Fees 0.25% 0.75% 1.00% None
Other Expenses(7) 0.50% 0.50% 0.50% 0.48%
Total Annual Fund Operating
Expenses 1.25% 1.75% 2.00% 0.98%
Fee Waivers and Expense
Reimbursements(8) -- -- -- --
--- --- --- -------
Net Expenses 1.25% 1.75% 2.00% 0.98%
</TABLE>
<TABLE>
<CAPTION>
MONEY
TAX FREE FUND MARKET
CLASS A CLASS B CLASS C FUND
<S> <C> <C> <C> <C>
Management Fees 0.50% 0.50% 0.50% 0.25%
Distribution and/or Service
(12b-1) Fees 0.25% 0.75% 1.00% None
Other Expenses(7) 0.75% 0.75% 0.75% 0.25%
Total Annual Fund Operating
Expenses 1.50% 2.00% 2.25% 0.50%
Fee Waivers and Expense
Reimbursements(8) -- -- -- --
--- --- --- -------
Net Expenses 1.50% 2.00% 2.25% 0.50%
</TABLE>
(6) The "Management Fees" and "Other Expenses" shown for the Government Bond,
Tax Free and Money Market Funds are for the period January 1 - August 31,
1999, and for the year ended August 31, 1999 for the Primary Fund.
(7) "Other Expenses" include the 0.25% Administrative Service Fee. Because
Class A, B, and C shares were not available prior to January 1, 1999,
"Other Expenses" are shown for the period January 1, 1999 - August 31, 1999
for the Government Bond, Tax Free and Money Market Funds, and for the year
ended August 31, 1999 for the Primary Fund.
(8) The Fee Table reflects fees waived and expenses assumed CONTRACTUALLY by
the funds' manager, Securities Management and Research, Inc. ("SM&R").
Pursuant to the Administrative Service Agreement, SM&R will pay (or
reimburse) each fund for regular operating expenses in excess of 1.25%
(0.50% for the Money Market Fund) per year of such fund's average daily net
assets. Regular operating expenses include the advisory fee and
administrative fee, but do not include the 12b-1 fee or class-specific
expenses.
The Fee Table does not reflect fees waived or expenses assumed by SM&R on a
VOLUNTARY basis. During the fiscal year ended August 31, 1999, SM&R
voluntarily waived fees of % and % for the Primary Fund and Tax Free
Fund, respectively. SM&R intends to continue to voluntarily waive the
advisory fee for the Tax Free Fund. SM&R also intends to reimburse regular
operating expenses that exceed average daily net assets as follows: 0.80%
for the Primary Fund and 1.00% for the Government Bond Fund. SM&R may
discontinue or reduce any such waiver or reimbursement of expenses at any
time without notice.
The following table shows fees and expenses for the Government Bond, Tax
Free and Money Market Funds for the period January 1 - August 31, 1999, and
for the year ended August 31, 1999 for the Primary Fund taking into account
all fee waivers and expense reimbursements, both contractual and voluntary.
9
<PAGE>
EXPENSES OF THE FUNDS
--------------------------------------------------------------------------
ANNUAL FUND OPERATING EXPENSES
(as a Percentage of Average Net Assets AFTER All Fee Waivers and Expense
Reimbursements)
<TABLE>
<CAPTION>
GOVERNMENT BOND FUND
CLASS A CLASS B CLASS C PRIMARY FUND
<S> <C> <C> <C> <C>
Management Fees 0.50% 0.50% 0.50% 0.32%
Distribution and/or Service
(12b-1) Fees 0.25% 0.75% 1.00% None
Other Expenses 0.50% 0.50% 0.50% 0.48%
Total Annual Fund Operating
Expenses 1.25% 1.75% 2.00% 0.80%
</TABLE>
<TABLE>
<CAPTION>
MONEY
TAX FREE FUND MARKET
CLASS A CLASS B CLASS C FUND
<S> <C> <C> <C> <C>
Management Fees 0.00% 0.00% 0.00% 0.25%
Distribution and/or Service
(12b-1) Fees 0.25% 0.75% 1.00% None
Other Expenses 0.75% 0.75% 0.75% 0.25%
Total Annual Fund Operating
Expenses 1.00% 1.50% 1.75% 0.50%
</TABLE>
- --------------------------------------------------------------------------------
EXPENSES
The tables below show the total expenses you would pay on a $10,000 investment
over one, three-, five-, and ten-year periods. These examples are intended to
help you compare the cost of investing in the funds with the cost of investing
in other mutual funds and are for illustration only. These examples also assume
that your investment has a 5% return each year, that you reinvest all of your
dividends and that the funds' operating expenses remain the same. YOUR ACTUAL
COSTS MAY BE HIGHER OR LOWER THAN SHOWN.
EXAMPLES OF FUND EXPENSES:
GOVERNMENT BOND FUND
<TABLE>
<CAPTION>
ASSUMING REDEMPTION ASSUMING NO REDEMPTION
AT END OF PERIOD AT END OF PERIOD
CLASS A CLASS B CLASS C CLASS A CLASS B CLASS C
<S> <C> <C> <C> <C> <C> <C>
1 Year
3 years
5 years
10 years
</TABLE>
TAX FREE FUND
<TABLE>
<CAPTION>
ASSUMING REDEMPTION ASSUMING NO REDEMPTION
AT END OF PERIOD AT END OF PERIOD
CLASS A CLASS B CLASS C CLASS A CLASS B CLASS C
<S> <C> <C> <C> <C> <C> <C>
1 Year
3 years
5 years
10 years
</TABLE>
PRIMARY FUND AND MONEY MARKET FUND
<TABLE>
<CAPTION>
ASSUMING REDEMPTION ASSUMING NO REDEMPTION
AT END OF PERIOD AT END OF PERIOD
1 YEAR 3 YEARS 5 YEARS 10 YEARS 1 YEAR 3 YEARS 5 YEARS 10 YEARS
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Primary Fund
Money Market
Fund
</TABLE>
10
<PAGE>
CHOOSING A SHARE CLASS THAT BEST SUITS YOU
--------------------------------------------------------------------------
SM&R Investments, Inc. offers four separate funds in this prospectus. Two of the
Funds offer three different retail share classes, each with its own sales charge
and distribution and service (12b-1) fee structures. Each class represents an
interest in the same fund. In addition to choosing an SM&R Fund, you should
select a share class that best suits your needs. You need to pay particularly
close attention to this fee structure when selecting the class best suited for
your needs. You should consider the factors below before investing. Your
representative can help you.
<TABLE>
<CAPTION>
CLASS A CLASS B CLASS C
(FRONT-END LOAD) (BACK-END LOAD) (LEVEL LOAD)
<S> <C> <C>
- -Front-end sales charges, as described -No front-end sales charge; all your -Lower front-end sales charge than Class
below. There are several ways to reduce money goes to work for you right away. A shares, as described below.
these charges, also described below.
- -Lower annual expenses than Class B or -Higher annual expenses than Class A -Higher annual expenses than Class A and
Class C shares. shares. Class B shares.
- -A deferred sales charge on shares you -A deferred sales charge on shares you -A deferred sales charge on shares you
sell within thirteen months of purchase sell within three years of purchase, as sell within thirteen months of
as described below. described below. purchase, as described below.
- -12b-1 fee of 0.25% of average net -12b-1 fee of 0.75% of average net -12b-1 fee of 1.00% of average net
assets. assets. assets.
-Automatic conversion to Class A shares -Does not convert to Class A shares.
after eight years, thus reducing future
annual expenses.
-Purchase amounts limited to amounts
less than $500,000.
</TABLE>
<TABLE>
<S> <C> <C>
- -Generally more appropriate for long- -Generally appropriate for investors who -Generally more appropriate for short-
term investors. may be averse to an up- front sales term investors.
charge and are willing to pay a
back-end sales charge and a higher
12b-1 fee for the first eight years.
</TABLE>
FOR EXPENSES OF CLASS A, B, AND C SHARES, SEE THE FEES AND EXPENSES OF THE FUNDS
EARLIER IN THIS PROSPECTUS.
The Money Market and Primary Funds each consist of a single class of shares
offered at net asset value and do not impose any sales charges or distribution
and service (12b-1) fees. The Government Bond and Tax Free Funds offer three
classes of shares through this Prospectus, called Class A, Class B, and Class C.
The Government Bond and Tax Free Funds offer other classes through separate
prospectuses. The other classes can only be bought by specified types of
investors or through certain distribution channels. FOR MORE INFORMATION ON THE
OTHER CLASSES OF SHARES OR TO REQUEST A PROSPECTUS FOR ANOTHER CLASS, CALL
INVESTOR SERVICES AT (800) 231-4639.
11
<PAGE>
SALES CHARGE REDUCTIONS AND WAIVERS
--------------------------------------------------------------------------
CLASS A SALES CHARGES
If you select Class A shares you pay a "front-end" sales charge of up to 4.75%.
The sales charge is a percentage of the offering price, as shown in the
following table:
<TABLE>
<CAPTION>
SALES CHARGE
SALES CHARGE AS A % OF
AS A % OF NET AMOUNT
AMOUNT OF INVESTMENT OFFERING PRICE INVESTED
<S> <C> <C>
Less than $50,000 4.75% 4.9%
$50,000 but less than $100,000 4.5% 4.7%
$100,000 but less than $250,000 3.5% 3.6%
$250,000 but less than $500,000 2.5% 2.6%
$500,000 but less than $1,000,000 1.5% 1.5%
$1,000,000 and over See below None
</TABLE>
INVESTMENTS OF $1 MILLION OR MORE
Although no "front-end" sales charge applies to purchases of $1 million and
over, you will pay a contingent deferred sales charge (CDSC) of 1.00% of the net
asset value if you redeem your shares within 13 months after you bought them.
The CDSC will be calculated in the same manner as for Class B shares, as
described under "CLASS B SALES CHARGES" below.
WAYS TO REDUCE YOUR CLASS A SALES CHARGE
1. Rights of Accumulation (ROA) may allow you to combine your current
investment with the current net asset value of shares held in all of your
Class T and Class A mutual fund accounts, managed by SM&R, on which you paid
a front-end sales charge, when determining whether you meet the threshold
for a reduced Class A sales charge.
2. Letter of Intent (LOI). If you agree to purchase at least $50,000 over a
13-month period, you pay the same sales charge as if you had invested the
full amount all at once. The Fund will hold 5% of the LOI amount in escrow
shares registered in your name until your LOI commitment is met. Escrow
shares are not eligible for exchange until the LOI is met or cancelled. An
LOI is not a binding obligation on your part to purchase the full amount of
the LOI shares or the funds to sell the full amount of the LOI shares
specified. An LOI may be implemented by --
- Completing the "Reduced Sales Charge" portion of the application
- Making an initial investment equal to 10% of the LOI amount
3. Class A Purchases in Funds Managed by SM&R. You may combine purchases made
at the same time in Class A shares of the Funds managed by SM&R on which a
front-end sales charge is paid, if you are:
(a) An individual;
(b) An individual, his or her spouse and trusts or custodial accounts for
their minor children;
(c) A trustee or fiduciary of a single trust estate or single fiduciary
account;
(d) Tax-exempt organizations specified in Sections 501(c)(3) or (13) of the
Internal Revenue Code, or employees' trusts, pension, profit-sharing, or
other employee benefit plans qualified under Section 401 of the Internal
Revenue Code; or
(e) Employees (or employers on behalf of employees) under any employee
benefit plan not qualified under Section 401 of the Internal Revenue
Code.
Purchases by employee benefit plans not qualified under Section 401 of the
Internal Revenue Code will qualify for quantity discounts only if the fund
will realize economies of scale in sales effort and sales related expenses
as a result of the employer's or the plan's bearing the expense of any
payroll deduction plan, making the fund's prospectus available to
participants, forwarding investments by participants to the funds or the
like.
Contact your representative or SM&R at 1-800-231-4639 if you think you may
qualify for these services.
ELIGIBLE NET ASSET VALUE PURCHASERS
If you qualify under one of the categories below, you may purchase Class A
shares without a "front-end" sales charge (at net asset value) to:
(a) persons purchasing shares for a federal or state sponsored
post-secondary education funding program;
(b) persons who have received a distribution from a pension, profit-sharing,
or other benefit plan, to the extent such distribution represents the
proceeds of a redemption of shares of any fund managed by SM&R (other
than the Money Market and Primary Funds);
12
<PAGE>
SALES CHARGE REDUCTIONS AND WAIVERS
--------------------------------------------------------------------------
(c) policyholders of American National subsidiaries that have entered into a
net asset value agreement with SM&R;
(d) members of any non-profit business, trade, professional, charitable,
civic or similar associations and clubs with an active membership of at
least 100 persons;
(e) registered representatives and employees of dealers who have entered
into mutual fund sales or distribution agreements with SM&R and members
of the immediate family (including spouse, children, parents and parents
of spouse) provided that purchases at net asset value are permitted by
the policies of the dealer; and
(f) any other persons that have been determined by the Board of Directors
(or by the distributor based on guidelines established by the Board) to
have acquired shares under circumstances not involving any sales expense
to the Funds.
YOU HAVE THE SOLE RESPONSIBILITY OF NOTIFYING SM&R THAT YOU INTEND TO QUALIFY
UNDER ONE OF THESE CATEGORIES.
The funds may terminate or change the terms of any waiver of sales charges at
any time.
CLASS B SALES CHARGES
You can purchase Class B shares at net asset value, without any initial sales
charge. However, there is a CDSC on shares you sell within three years of buying
them. The CDSC shown in the following table is a percentage of the offering
price:
<TABLE>
<CAPTION>
CONTINGENT DEFERRED
SALES CHARGE
(AS A % OF
YEARS SINCE PURCHASE OFFERING PRICE)
<S> <C>
Year 1 3.00%
Year 2 2.00%
Year 3 1.00%
Year 4+ None
</TABLE>
If the net asset value of shares being redeemed has increased since you bought
them, we do not impose any CDSC on such increase in net asset value. We do not
impose any CDSC on shares you buy with reinvested dividends or capital gain
distributions. We will minimize any applicable CDSC by assuming that an investor
(i) first redeems Class B shares bought through reinvested dividends and capital
gains distributions, and (ii) next redeems Class B shares held the longest.
COMPUTING CDSC
If the net asset value of shares being redeemed has increased since you bought
them, we do not impose a CDSC on the increase in net asset value. We do not
impose a CDSC on shares bought with reinvested dividends or capital gain
distributions.
We will minimize any applicable CDSC by assuming that an investor --
(i) first redeems Class B shares bought through reinvested dividends and
capital gains distributions, and
(ii) next redeems Class B shares held the longest.
CLASS B WAIVERS OF CONTINGENT DEFERRED SALES CHARGES
The CDSC will be waived on the following redemptions of Class B shares:
(1) 12% FREE AMOUNT. We waive the CDSC on redemptions pursuant to a systematic
withdrawal plan of up to 12% of account value per year. We apply this 12%
waiver on a per fund basis to the account value determined at the time you
elect a systematic withdrawal plan. (Remember that the CDSC does not apply
to appreciation and reinvested dividends. Redemptions from appreciation and
reinvested dividends, which occur first, do not count toward the 12% free
amount.)
(2) DEATH OR DISABILITY. We waive the CDSC on redemptions of Class B shares
following the shareholder's death or disability, so long as:
(a) the disability began after the shares were purchased;
(b) SM&R is notified of such death or disability at the time of the
redemption request and receives satisfactory evidence of such death or
post-purchase disability;
(c) the redemptions are made within one year following death or initial
determination of disability; and
(d) the shares were held at the time of death or initial determination of
disability.
13
<PAGE>
SALES CHARGE REDUCTIONS AND WAIVERS
--------------------------------------------------------------------------
For purposes of this waiver, the death or disability must meet the
definition in Section 72(m)(7) of the Internal Revenue Code (the "Code"). If
the shares are held in a joint account, then all registered joint owners
must be dead or disabled.
(3) MINIMUM REQUIRED DISTRIBUTIONS. We waive the CDSC on redemptions of Class B
shares in connection with certain distributions from four types of qualified
retirement plans: IRAs, custodial accounts maintained pursuant to Code
Section 403(b), deferred compensation plans qualified under Code 457 and
plans qualified under Code Section 401. To qualify for the waiver, the
redemptions must result from one of the following:
(a) required minimum distributions to plan participants or beneficiaries who
are age 70 1/2 or older to the extent it does not exceed 12% annually of
the participant's or beneficiary's account value;
(b) tax-free rollovers or transfers of assets to another IRA, Section 403(b)
plan, Section 457 plan or Section 401 plan invested in Class B shares of
one or more funds managed by SM&R;
(c) tax-free returns of excess contributions or returns of excess deferral
amounts; and
(d) distributions upon the death or disability (as defined in the Code) of
the participant or beneficiary.
(4) SMALL ACCOUNTS. We waive the CDSC on redemptions by the funds of small
accounts (accounts with a value less than $500).
(5) SM&R INVESTMENTS. We waive the CDSC on redemptions of shares owned by SM&R
or any of its affiliates.
CLASS C SALES CHARGES
Class C shares are sold at the net asset value plus a "front-end" sales charge
of 1.00% of the offering price. A contingent deferred sales charge of 1.00% also
applies on redemptions of Class C shares during the first thirteen months after
purchase.
DISTRIBUTION AND SHAREHOLDER SERVICE (12B-1) FEE
Classes A, B, and C pay SM&R, the principal underwriter, a distribution and/or
shareholder servicing (12b-1) fee. BECAUSE DISTRIBUTION AND/OR SHAREHOLDER
SERVICING (12b-1) FEES ARE PAID OUT OF FUND ASSETS ON AN ONGOING BASIS, 12B-1
FEES MAY, OVER TIME, INCREASE THE COST OF YOUR INVESTMENT IN A FUND AND BE MORE
EXPENSIVE THAN A HIGHER "FRONT-END LOAD."
These fees are computed as an annual percentage of the average daily net assets
of each class of shares of a fund, as follows:
<TABLE>
<CAPTION>
DISTRIBUTION SERVICE TOTAL 12b-1
CLASS FEE FEE FEE
<S> <C> <C> <C>
Class A Shares
(FRONT-END LOAD) 0.25% -0- 0.25%
Class B Shares
(BACK-END LOAD (CDSC)) 0.50% 0.25% 0.75%
Class C Shares
(LEVEL LOAD) 0.75% 0.25% 1.00%
</TABLE>
The distribution fee is for services that are primarily intended to result in or
are primarily attributable to the distribution of the Class A, B, and C shares.
The service fee is for providing ongoing servicing to shareholders of the Class
B and C shares. These fees compensate SM&R, or enable SM&R to compensate other
persons (including distributors of the shares), for providing such services.
14
<PAGE>
INVESTMENT OBJECTIVES AND POLICIES
--------------------------------------------------------------------------
Each fund pursues its own investment objective through various investment
policies and techniques. You should keep in mind that each SM&R Mutual Fund has
a different investment objective, each will have different investment results
and incur different market, financial and other risks.
ONLY THE PRINCIPAL INVESTMENT STRATEGIES OF EACH FUND AND THE PRINCIPAL TYPES OF
SECURITIES EACH FUND PLANS TO PURCHASE ARE DESCRIBED BELOW.
More investment information is in the Statement of Additional Information. These
policies and techniques are not fundamental and may be changed by the Board of
Directors without shareholder approval.
GOVERNMENT BOND FUND
The Government Bond Fund seeks to achieve its objective through investment of
65% or more of its total assets in securities issued or guaranteed by the U.S.
Government, its agencies or instrumentalities ("U.S. Government Obligations")
which include, but are not limited to, U.S. Treasury Bonds, Notes and Bills and
securities issued by instrumentalities of the U.S. Government.
U.S. GOVERNMENT OBLIGATIONS
There are two broad categories of U.S. Government Obligations:
(1) direct obligations of the U.S. Treasury, and
(2) obligations issued or guaranteed by agencies or instrumentalities of the
U.S. Government.
Some obligations issued or guaranteed by agencies or instrumentalities of the
U.S. Government are backed by the full faith and credit of the United States
(such as Government National Mortgage Association Certificates); others, by
the agency or instrumentality with limited rights of the issuer to borrow from
the U.S. Treasury (such as Federal National Mortgage Association Bonds); and
others, only by the credit of the issuer. No assurance can be given that the
U.S. Government would lend money to or otherwise provide financial support to
U.S. Government sponsored instrumentalities; it is not obligated by law to do
so.
MORTGAGE-BACKED SECURITIES
We anticipate that a substantial portion of the Government Bond Fund's
portfolio will consist of mortgage-backed securities issued or guaranteed by
the U.S. Government, its agencies, or instrumentalities. These securities
represent part ownership of pools of mortgage loans secured by real property,
such as certificates issued by the Government National Mortgage Association
("GNMA" or "Ginnie Mae"), the Federal National Mortgage Association ("FNMA" or
"Fannie Mae"), and the Federal Home Loan Mortgage Corporation ("FHLMC" or
"Freddie Mac"). Mortgage-backed securities also include mortgage pass-through
certificates representing participation interests in pools of mortgage loans
originated by the U.S. Government and guaranteed by U.S. Government agencies
such as GNMA, FNMA, or FHLMC. Such certificates, which are ownership interests
in the underlying mortgage loans, differ from conventional debt securities
which provide for periodic payment of interest in fixed amounts and principal
payments at maturity or on specified dates. With pass-through certificates,
both principal and interest payments, including prepayments, are passed
through to the holder of the certificate and provide for monthly payments of
interest and principal. GNMA, a federal agency, issues pass-through
certificates that are guaranteed as to timely payment of principal and
interest. FNMA, a federally chartered and privately owned corporation, issues
mortgage pass-through securities and guarantees them as to timely payment of
principal and interest. FHLMC, a corporate instrumentality of the United
States, issues participation certificates that represent an interest in
mortgages from FHLMC's portfolio. FHLMC guarantees the timely payment of
interest and the ultimate collection of principal. FNMA and FHLMC are not
backed by the full faith and credit of the United States, although FNMA and
FHLMC are authorized to borrow from the U.S. Treasury to meet their
obligations. Those mentioned are but a few of the mortgage-backed securities
currently available. The Government Bond Fund will not purchase interest-only
or principal-only mortgage-backed securities.
The yield characteristics of mortgage-backed securities differ from
traditional debt securities. Among the major differences are that interest and
principal payments are made more frequently, usually monthly, and that
principal may be prepaid at any time because the underlying mortgage loans
generally may be prepaid at any time. The average
15
<PAGE>
INVESTMENT OBJECTIVES AND POLICIES
--------------------------------------------------------------------------
mortgage in a pool may be expected to be repaid within about twelve (12)
years. If mortgage interest rates decrease, the value of the Government Bond
Fund's securities will generally increase. However, we anticipate that the
average life of the mortgages in the pool will decrease as borrowers refinance
and prepay mortgages to take advantage of lower interest rates. The Government
Bond Fund invests the proceeds from such prepayments at the then prevailing
lower interest rates. On the other hand, if interest rates increase, the value
of the Fund's securities generally will decrease while it is anticipated that
borrowers will not refinance and, therefore, the average life of the mortgages
in the pool will be longer. In addition, if the Government Bond Fund purchases
such a security at a premium, a prepayment rate faster than expected will
reduce yield to maturity, while a prepayment rate slower than expected will
have the opposite effect of increasing yield to maturity. Conversely, if the
Government Bond Fund purchases these securities at a discount, faster than
expected prepayments will increase yield to maturity, while slower than
expected prepayments will reduce yield to maturity.
COLLATERALIZED MORTGAGE OBLIGATIONS
The Government Bond Fund may invest a portion of its assets in collateralized
mortgage obligations or "CMOs," which are debt obligations collateralized by a
portfolio or pool of mortgages, mortgage-backed securities, or U.S. Government
securities. Collateralized obligations in which the Government Bond Fund may
invest are issued or guaranteed by a U.S. Government agency or
instrumentality, such as the FHLMC. A variety of types of collateralized
obligations are currently available and others may become available in the
future. One should keep in mind that during periods of rapid interest rate
fluctuation, the price of a security, such as a CMO, could either increase or
decrease based on inherent interest rate risk. Additionally, the risk of
maturities shortening or lengthening in conjunction with interest rate
movement, could magnify the overall effect of the price fluctuation.
A CMO is often issued in multiple classes with varying maturities and interest
rates. As a result the investor may obtain greater predictability of maturity
than with direct investments in mortgage-backed securities. Thus, classes with
shorter maturities may have lower volatility and lower yield while those with
longer maturities may have higher volatility and higher yields. This provides
the investor with greater control over the characteristics of the investment
in a changing interest rate environment. A more complete description of CMOs
is contained in the Statement of Additional Information.
The Government Bond Fund may also invest in parallel pay CMOs and Planned
Amortization Class CMOs ("PAC Bonds"). Parallel pay CMOs are structured to
provide payments of principal on each payment date to more than one class. PAC
Bonds generally require payments of a specified amount of principal on each
payment date. PAC Bonds are always parallel pay CMOs with the required
principal payment on such securities having the highest priority after
interest has been paid to all classes.
The Government Bond Fund may also invest in securities issued by private
issuers that represent an interest in or are secured by mortgage-backed
securities issued or guaranteed by the U.S. government or one of its agencies
or instrumentalities. In addition, the fund may invest in securities issued by
private issuers that represent an interest in or are secured by mortgage loans
or mortgage-backed securities without a government guarantee but usually have
some form of private credit enhancement.
ZERO COUPON BONDS
The Government Bond Fund may invest in zero coupon bonds, which are debt
obligations issued or purchased at a significant discount from face value. The
Government Bond Fund will only purchase zero coupon bonds which are U.S.
Government Obligations. The discount approximates the total amount of interest
the bonds will accrue and compound over the period until maturity or the first
interest payment date at a rate of interest reflecting the market rate of the
security at the time of issuance. Zero coupon bonds do not entitle the holder
to any periodic payments of interest prior to maturity. Its value as an
investment consists of the difference between its face value at the time of
maturity and the price for which it was acquired which is generally an amount
significantly less than face value (sometimes referred to as a "deep
16
<PAGE>
INVESTMENT OBJECTIVES AND POLICIES
--------------------------------------------------------------------------
discount" price). Zero coupon bonds require a higher rate of return to attract
investors who are willing to defer receipt of cash. Accordingly, although not
providing current income, SM&R believes that zero coupon bonds can be
effectively used to lock in a higher rate of return in a declining interest
environment. Such investments may experience greater volatility in market
value than debt obligations which make regular payments of interest. The Fund
will accrue income on such investments for tax and accounting purposes, as
required, which is distributable to shareholders and which, because no cash is
received at the time of accrual, may require the liquidation of other
portfolio securities to satisfy the Fund's distribution obligations.
TAX FREE FUND
The Tax Free Fund, as a matter of fundamental policy, seeks to achieve its
objective by investing at least 80% of the value of its net assets in municipal
securities the interest on which is exempt from federal income taxes.
The Tax Free Fund has no restrictions on the maturity of municipal securities in
which it may invest. Accordingly, it will seek to invest in municipal securities
of such maturities which, in the judgement of SM&R, the adviser, will provide a
high level of current income consistent with prudent investment, with
consideration given to market conditions.
The Tax Free Fund will invest, without percentage limitations, in municipal
securities having at the time of purchase one of the four highest municipal
ratings by Moody's Investor Service, Inc. ("Moody's"), Standard & Poor's
Corporation ("S&P"), or Fitch IBCA ("Fitch") (E.G., MIG 4 or higher by Moody's)
or in securities which are not rated, provided that, in the opinion of SM&R,
such securities are comparable in quality to those within the four highest
ratings. The rating agencies consider that bonds rated in the fourth highest
category may have some speculative characteristics and that changes in economic
conditions or other circumstances are more likely to lead to a weakened capacity
to make principal and interest payments on those bonds than is the case with
higher grade bonds. SM&R will only purchase bonds rated in such fourth category
if it believes that the purchase of such bonds is consistent with the Tax Free
Fund's investment objective. In the event the rating of an issue held by the Tax
Free Fund is changed by the rating service, such change will be considered by
the Tax Free Fund in its evaluation of the overall investment merits of that
security but such change will not necessarily result in an automatic sale of the
security. Any security held which is subsequently downgraded below BBB by S&P or
Baa by Moody's will be sold as soon as it is advantageous to do so after the
downgrade. A description of the ratings may be found in the Appendix to this
Prospectus.
Purchasing unrated municipal securities, which may be less liquid than
comparably rated municipal securities, involves somewhat greater risk and
consequently the Tax Free Fund may not invest more than 20% of its net assets in
unrated municipal securities. To attempt to minimize the risk of such
investments, SM&R will, prior to acquiring unrated securities, consider the
terms of the offering and various other factors to determine the issuer's
comparative credit rating and whether the securities are consistent with the Tax
Free Fund's investment objective and policies.
During normal market conditions, the Tax Free Fund will have at least 80% of its
net assets invested in municipal securities the income of which is fully exempt
from federal income taxation. Furthermore, under normal market conditions up to
20% of the Tax Free Fund's net assets, and as a temporary defensive measure
during abnormal market conditions, up to 50% of its net assets may be invested
in the following types of taxable fixed income obligations:
(1) obligations issued or guaranteed by the U.S. government, its agencies,
instrumentalities or authorities (See "Government Bond Fund" above for an
explanation of U.S. government obligations);
(2) corporate debt securities which at the date of the investment are rated A
or higher by Moody's, S&P or Fitch;
(3) commercial paper which at the date of the investment is rated in one of
the two top categories by Moody's or by S&P or if not rated, is issued by
a company which at the date of the investment has an outstanding debt
issue rated A or higher by Moody's or A or higher by S&P;
17
<PAGE>
INVESTMENT OBJECTIVES AND POLICIES
--------------------------------------------------------------------------
(4) certificates of deposit issued by U.S. banks which at the date of the
investment have capital surplus and undivided profits of $1 billion as of
the date of their most recently published financial statements; and
(5) repurchase agreements secured by U.S. government securities, provided that
no more than 15% of the Fund's net assets will be invested in illiquid
securities including repurchase agreements with maturities in excess of
seven days.
To the extent income dividends include income from taxable sources, a portion of
a shareholder's dividend income may be taxable. (See "Dividends, Distributions,
and Taxes"). In addition, Congress could enact tax legislation such as a flat
tax rate that would make tax-free bonds less desirable to investors seeking ways
to reduce taxable income. If that were to occur, it could cause the value of the
securities to drop.
The Tax Free Fund's ability to achieve its objective depends partially on the
prompt payment by issuers of the interest on and principal of the municipal
securities held. A moratorium, default, or other non-payment of interest or
principal when due could, in addition to affecting the market value and
liquidity of the particular security, affect the market value and liquidity of
other municipal securities. Additionally, the market for municipal securities is
often thin and can be temporarily affected by large purchases and sales. As a
result, the Tax Free Fund will attempt to minimize risk by diversifying its
investments by investing no more than 5% of its net assets in the securities of
any one issuer (this limitation does not apply to investments issued or
guaranteed by the U.S. Government or its instrumentalities) and by investing no
more than 25% of its net assets in municipal securities issued in any one state
or territory. Each political subdivision, agency, instrumentality, and each
multi-state agency of which a state is a member will be regarded as a separate
issuer for the purpose of determining diversification.
MUNICIPAL SECURITIES
The term "municipal securities," as used in this Prospectus means obligations
issued by or on behalf of states, territories, and possessions of the U.S. and
the District of Columbia and their political subdivisions, agencies, and
instrumentalities, the interest on which is exempt from federal income tax. An
opinion as to the tax-exempt status of a municipal security generally is
rendered to the issuer by the issuer's counsel at the time of issuance of the
security. Neither the funds nor SM&R will review the proceedings relating to
the issuance of municipal obligations or the basis for opinions of counsel.
Municipal securities are used to raise money for various public purposes such
as constructing public facilities and making loans to public institutions.
Certain types of municipal bonds are issued to obtain funding for privately
operated facilities. Further information on the maturity and funding
classifications of municipal securities is included in the Statement of
Additional Information.
Yields on municipal securities vary, depending on a variety of factors,
including the general condition of the financial markets and of the municipal
securities market, the size of a particular offering, the maturity of the
obligation and the credit rating of the issuer. Like other interest-bearing
securities, the value of municipal securities changes as interest rates
fluctuate. For example, if interest rates increase from the time a security is
purchased, the security's value and sales price generally will be less than
its purchase cost. Conversely, if interest rates decline from the time a
security is purchased, the security's value and sales price may be greater
than its purchase cost. Generally, municipal securities of longer maturities
produce higher current yields than municipal securities with shorter
maturities but are subject to greater price fluctuation due to changes in
interest rates, tax laws and other general market factors. Lower-rated
municipal securities generally produce a higher yield with shorter maturities
than higher-rated municipal securities due to the perception of a greater
degree of risk as to the ability of the issuer to pay principal and interest.
The Tax Free Fund may purchase municipal bonds for which the payments of
principal and interest are secured by an escrow account of securities backed
by the full faith and credit of the U.S. government ("defeased") and municipal
securities whose principal and interest payments are insured by a commercial
insurance company as long as the underlying credit is investment grade (BBB or
better by S&P and Fitch and Baa or better by Moody's) ("insured"). The Tax
Free Fund may also purchase
18
<PAGE>
INVESTMENT OBJECTIVES AND POLICIES
--------------------------------------------------------------------------
unrated securities of issuers which SM&R believes would have been rated BBB or
Baa had the issuer requested a rating from S&P, Fitch or Moody's. Such implied
investment grade rating will be determined by SM&R upon its performance of a
credit analysis of the issue and the issuer. Such credit analysis may consist
of a review of such items as the issuer's debt characteristics, financial
information, structure of the issue, liquidity of the issue, quality of the
issuer, current economic climate, financial adviser, and underwriter. Insured
and defeased bonds are further described in the Statement of Additional
Information. In general, these types of municipal securities will not be
treated as an obligation of the original municipality for purposes of
determining industry concentration.
PRIMARY FUND
Commercial paper is short-term unsecured promissory notes issued by corporations
to finance short-term credit needs. Commercial paper is usually sold on a
discount basis and has a maturity at the time of issuance not exceeding nine
months. The Primary Fund will invest only in commercial paper which, at the date
of such investment, is rated in one of the two top categories by one or more of
the nationally recognized statistical rating organizations ("NRSROs") (See the
"Appendix" hereto for information about such ratings and such rating
organizations).
The Primary Fund, consistent with its investment objective, will attempt to
maximize yield by trying to take advantage of changing conditions and trends. It
may also attempt to take advantage of what are believed to be disparities in
yield relationships between different instruments. This procedure may increase
or decrease the portfolio yield depending upon the Primary Fund's ability to
correctly time and execute such transactions. Although the Primary Fund's assets
will be invested in securities with short maturities, the Primary Fund will
manage its portfolio as described above. (See "Portfolio Transactions and
Brokerage Allocation" in the Statement of Additional Information.)
OTHER INVESTMENTS
The Primary Fund may invest in (i) U.S. Government Obligations (See the
"Government Bond Fund" above for an explanation of U.S. Government
Obligations); (ii) other corporate obligations, such as bonds, debentures or
notes maturing in five (5) years or less at the time of purchase which at the
date of the investment are rated "A" or higher by an NRSRO; and (iii)
negotiable certificates of deposit of banks (including U.S. dollar denominated
obligations of foreign branches of U.S. banks and U.S. branches of foreign
banks and savings and loan associations and banker's acceptances of U.S. banks
which banks and savings and loan associations have total assets at the date of
investment (as of the date of their most recent published financial
statements) of at least $1 billion (See "INVESTMENT OBJECTIVES AND POLICIES --
Certificates of Deposit and Bankers Acceptances" in the Statement of
Additional Information for a description of the securities) and (iv)
repurchase agreements with respect to any type of instrument in which the
Primary Fund is authorized to invest even though the underlying instrument may
mature in more than two (2) years.
MONEY MARKET FUND
The Money Market Fund seeks to achieve its objective by investing in short-term
money market instruments determined to be of high quality by SM&R pursuant to
guidelines established by the Company's Board of Directors. The Money Market
Fund may invest in the following types of high quality debt obligations:
(1) U.S. GOVERNMENT OBLIGATIONS. U.S. Government Obligations consist of
marketable securities issued or guaranteed as to both principal and
interest by the United States Government or by its agencies and
instrumentalities. (See "Government Bond Fund" above for an explanation of
U.S. Government Obligations).
(2) CERTIFICATES OF DEPOSIT. Certificates of deposit are negotiable
certificates issued against funds deposited in a commercial bank for a
definite period of time and earning a specified return. The Money Market
Fund will invest only in certificates of deposit of U.S. banks that have
total assets in excess of $1 billion at the time of investment.
(3) BANKER'S ACCEPTANCES. Banker's acceptances are short-term instruments
issued by banks, generally for the purpose of financing imports or
exports. An acceptance is a time draft drawn
19
<PAGE>
INVESTMENT OBJECTIVES AND POLICIES
--------------------------------------------------------------------------
on a bank by the importer or exporter to obtain a stated amount of funds
to pay for specific merchandise. The draft is then "accepted" and is an
irrevocable obligation of the issuing bank.
(4) COMMERCIAL PAPER. As discussed above under "Primary Fund," commercial
paper is short-term unsecured promissory notes issued by corporations to
finance short-term credit needs.
(5) BONDS AND NOTES. The Money Market Fund may invest in corporate bonds or
notes with a remaining maturity of one year or less.
(6) COLLATERALIZED MORTGAGE OBLIGATIONS. As discussed above under "Government
Bond Fund," CMOs are debt obligations collateralized by a portfolio or
pool of mortgages, mortgage-backed securities, or U.S. Government
securities.
The Money Market Fund does not currently intend to invest in unrated securities,
securities subject to demand features, floating rate instruments, securities
subject to guarantees, and variable rate instruments.
The Money Market Fund limits its investments to those short-term securities that
the Board determines present minimal credit risk and that are "Eligible
Securities" when acquired by the Fund. As used in this Prospectus, "Eligible
Securities" means securities that are:
(a) rated in one of the two highest short-term rating categories, or
(b) whose issuer has another class of debt obligations rated in one of the two
highest short-term rating categories.
To rely on a rating assigned to other debt obligations, those obligations must
be of comparable priority and security. All ratings must have been issued by the
requisite NRSROs. Currently, five organizations are NRSROs: Moody's, S&P, Fitch
IBCA, Duff and Phelps, Inc., and Thomson BankWatch, Inc. A discussion of the
ratings categories of S&P and Moody's is contained in the Appendix.
The Money Market Fund generally limits its investments in securities, as
follows:
- It will not invest in securities issued by any one issuer, other than the
U.S. Government, its agencies, or instrumentalities, in an amount that
exceeds 5% of its total assets.
- It will not invest more than 5% of its total assets in securities relying on
ratings in the second highest rating category.
- It will not invest more than 1% of its total assets in securities of any one
issuer that rely on ratings in the second highest rating category.
(See "Investment Objectives and Policies" in the Statement of Additional
Information for a more detailed explanation of the investment categories.) The
Fund will maintain a dollar-weighted average portfolio maturity of 90 days or
less, and will not invest in any security with a remaining maturity of over 397
days (13 months).
Investments in money market instruments are subject to the ability of the issuer
to make payment at maturity. In addition, the Money Market Fund's performance
will vary depending on changes in short-term interest rates. However, both the
financial and market risks of investment in the Money Market Fund may be
expected to be less than for any other Fund. By limiting its investments to
Eligible Securities, the Money Market Fund may not achieve as high a level of
current income as a fund investing in lower-rated securities.
20
<PAGE>
OTHER RISK FACTORS
--------------------------------------------------------------------------
In addition to the common risk factors discussed earlier, the funds may also be
subject to one or more of the following risks.
DEBT SECURITIES RISKS. Debt securities are subject to change in their values
due to changes in prevailing interest rates. The magnitude of these
fluctuations will often be greater for longer-term debt securities than
shorter-term debt securities. When prevailing interest rates fall, the values
of already-issued debt securities generally rise. Accordingly, if interest
rates go down after a security is purchased, such security might be valued
and/or sold at a price greater than its cost. If interest rates were to drop
dramatically, some of the securities could be called and/or prepaid, requiring
reinvesting in securities at much lower yields.
On the other hand, when prevailing interest rates rise, the values of
already-issued debt securities generally fall. Accordingly, if interest rates
increase after a security is purchased, such security might be valued and/or
sold at a price less than its cost. In such circumstances, the value of
existing bonds decrease because the interest payments from existing bonds are
less attractive than new issues with higher interest rates and investors would
lose money if they liquidate holdings.
The funds could lose money if any bonds they own are downgraded in credit
rating or go into default. A moratorium, default, or other non-payment of
interest or principal when due could, in addition to affecting the market
value and liquidity of the particular security, affect the market value and
liquidity of other securities. A change in credit rating of an issuer can also
affect the bond's value, thus affecting the market value of the funds.
However, the funds invest predominately in investment grade bonds in order to
minimize credit risk. (See "Investment Objectives and Policies" for more
information about the ratings required for investments by each specific fund.)
Moreover, substantial redemptions of fund shares could require a fund to sell
portfolio securities at a time when a sale might not be favorable.
U.S. GOVERNMENT OBLIGATIONS. Investments in U.S. Government Obligations are not
all backed by the "full faith and credit" of the United States Government.
Some are backed only by the rights of the issuer to borrow from the U.S.
Treasury and others are supported only by the credit of the issuing
instrumentality. No assurance can be given that the U.S. Government would lend
money to or otherwise provide financial support to U.S. Government sponsored
instrumentalities.
MARKET RISKS. Because the funds may invest in debt obligations which are traded
on securities exchanges, the value of each fund's portfolio will be affected
by changes in the stock markets. At times, the stock markets can be volatile
and stock prices can change substantially. This market risk will affect each
fund's net asset value per share, which will fluctuate as the values of each
fund's portfolio securities change. Prices do not always change uniformly or
at the same time and the various stock markets do not always move in the same
direction at the same time. Other factors specific to a particular company
also affect the price of that company's debt obligations (for example, poor
earnings, loss of major customers, or major litigation). The funds cannot
always predict the factors that will affect a security's price. The funds,
however, do attempt to limit market risk by diversifying their investments.
The funds diversify their investments by generally investing only a small
percentage of their assets in the debt obligations of any one company and by
not holding a substantial amount of the debt obligations of any one company.
REPURCHASE AGREEMENTS. In a repurchase agreement, a fund buys a security and
simultaneously sells it to the vendor for delivery at a future date. These
agreements are used primarily for cash purposes. A fund entering into a
repurchase agreement may lose money if the other party to the transaction
fails to pay the resale price on the delivery date. Such a default may delay
or prevent the fund from disposing of the underlying securities. The value of
the underlying securities may go down during the period in which the fund
seeks to dispose of them. Also, the fund may incur expenses while trying to
sell the underlying securities. Finally, the fund risks losing all or a part
of the income from the agreement.
21
<PAGE>
THE FUNDS AND THEIR MANAGEMENT
--------------------------------------------------------------------------
INVESTMENT ADVISOR
The Company's Board of Directors has delegated to Securities Management and
Research, Inc. ("SM&R"), the funds' investment adviser, the management of the
funds' day-to-day business and affairs. In addition, SM&R invests the funds'
assets, provides administrative services, and serves as transfer agent,
custodian, dividend paying agent, and underwriter.
SM&R is a wholly-owned subsidiary of American National Insurance Company
("American National"). SM&R was incorporated in 1964 and has managed mutual
funds since 1966. SM&R does and may, from time to time, serve as investment
adviser to other clients including employee benefit plans, other investment
companies, banks, foundations and endowment funds.
The Funds pay SM&R an investment advisory fee, which is calculated daily for
each fund and paid monthly. The advisory agreement between the Company and SM&R
spells out the management fee and other expenses that the Funds must pay.
The Government Bond Fund and Tax Free Fund each pay a management fee based on
the following schedule:
<TABLE>
<CAPTION>
AVERAGE DAILY NET ASSETS ANNUAL PERCENTAGE
OF EACH FUND RATE
<S> <C>
Not exceeding $100,000,000 0.50%
Exceeding $100,000,000 but not exceeding
$300,000,000 0.45%
Exceeding $300,000,000 0.40%
</TABLE>
The Money Market and Primary Funds pay SM&R a management fee calculated at the
annual rate of 0.25% and 0.50%, respectively, of each Fund's average daily net
asset value.
After applicable fee waivers, SM&R received total advisory fees from the
Government Bond Fund and Primary Fund for the year ended August 31, 1999 which
represented % and %, respectively, of each such fund's average daily net
assets. SM&R waived all advisory fees for the Tax Free Fund for the fiscal year
ended August 31, 1999.
ADMINISTRATIVE SERVICES
The Funds pay SM&R an administrative service fee under an administrative service
agreement between the Company and SM&R. This agreement states that the Company
will pay SM&R for non-investment related management, executive, administrative,
transfer agent, and operation services to the Funds. Each Fund is subject to an
administration service fee at the annual rate of average daily net asset values
as follows:
<TABLE>
<CAPTION>
ADMINISTRATIVE
ON THE PORTION OF THE FUND'S SERVICE FEE
AVERAGE DAILY NET ASSETS ANNUAL RATE
<S> <C>
Not exceeding $100,000,000 0.25%
Exceeding $100,000,000 but not exceeding
$200,000,000 0.20%
Exceeding $200,000,000 but not exceeding
$300,000,000 0.15%
Exceeding $300,000,000 0.10%
</TABLE>
REIMBURSEMENTS AND WAIVERS
SM&R has agreed to pay (or to reimburse each Fund for) each Fund's regular
operating expenses in excess of 1.25% (0.50% for the Money Market Fund) per year
of such Fund's average daily net assets. Regular operating expenses include the
advisory fee and administrative service fee, if any, paid to SM&R, but do not
include 12b-1 fees, class-specific expenses, interest, taxes, commissions, and
other expenses incidental to portfolio transactions. SM&R received
administrative service fees of % for the fiscal year ended August 31, 1999 of
each fund's average daily net assets.
In order to improve the yield and total return of any fund, SM&R may from time
to time voluntarily waive or reduce all or any portion of its advisory fee,
administrative fee, and/or assume certain or all expenses of any fund of the
Company while retaining its ability to be reimbursed for such fees prior to the
end of the fiscal year. Fee waivers and/or reductions, other than those stated
in the Administrative Service Agreement, may be rescinded by SM&R at any time
without notice to investors. SM&R has agreed to continue to waive the advisory
fee for the Tax Free Fund and reimburse expenses incurred by the Government Bond
and Primary Funds to the extent that regular operating expenses exceed average
daily net assets as follows: 0.80% for the Primary Fund and 1.00% for the
Government Bond Fund.
22
<PAGE>
THE FUNDS AND THEIR MANAGEMENT
--------------------------------------------------------------------------
PORTFOLIO MANAGEMENT
While the following individuals are primarily responsible for the day-to-day
portfolio management of their respective funds, all accounts are reviewed on a
regular basis by SM&R's Investment Committee to ensure that they are being
invested in accordance with investment policies.
TERRY E. FRANK, VICE PRESIDENT, PORTFOLIO MANAGER OF THE GOVERNMENT BOND FUND,
TAX FREE FUND, PRIMARY FUND AND MONEY MARKET FUND. Ms. Frank has served as
Portfolio Manager of the Government Bond Fund since 1993 and the Tax Free Fund
since its inception. She has served as Portfolio Manager of the Primary Fund
since November 1998 and the Money Market Fund since its inception (January 1,
1999). She also serves as Portfolio Manager of the Money Market Portfolio of
American National Investment Accounts, Inc., a series mutual fund used
exclusively for variable contracts issued by American National. She joined
SM&R's investment staff in 1991 and prior to that time she held positions with
American Capital Asset Management and Gibraltar Savings Association as a
securities analyst and Equitable Investment Services as a research analyst.
JOHN S. MAIDLOW, ASSISTANT PORTFOLIO MANAGER OF THE PRIMARY FUND AND THE MONEY
MARKET FUND. Mr. Maidlow has served as the Assistant Portfolio Manager of the
Primary Fund since November, 1998 and the Money Market Fund since its
inception (January 1, 1999). He also serves as Assistant Portfolio Manager of
the Money Market Portfolio of American National Investment Accounts, Inc., a
series mutual fund used exclusively for variable contracts issued by American
National. He joined SM&R's staff in 1998 and prior to that time he held
positions with American Industries Trust Companies as a trust officer, Texas
Department of Insurance and the Texas Department of Banking as an examiner,
Landmark Group as Vice President of Investments, MBank as a trust officer and
Rotan-Mosle, Inc. and Eppler, Guerin & Turner as an investment broker.
23
<PAGE>
FINANCIAL HIGHLIGHTS
--------------------------------------------------------------------------
UNDERSTANDING THE FINANCIAL HIGHLIGHTS
The table on the next page itemizes what contributed to the changes in the share
price during the period. It also shows the changes in share price for this
period in comparison to changes over the last five fiscal years or less, if the
fund is not five years old.
On a per-share basis, the table includes as appropriate
- share price at the beginning of the period
- investment income and capital gains or losses
- distributions of income and capital gains paid to shareholders
- share price at the end of the period
The table also includes some key statistics for the period as appropriate
- Total Return -- the overall percentage of return of the fund, assuming the
reinvestment of all distributions
- Expense Ratio -- operating expenses as a percentage of average net assets
- Net Income Ratio -- net investment income as a percentage of average net
assets
- Portfolio Turnover -- the percentage of the fund's buying and selling
activity
The Financial Highlights have been audited by the Fund's independent auditors,
Tait, Weller & Baker, LLP. Their Independent Auditor's Report is included in the
fund's annual report for the year ended August 31, 1999, which is incorporated
by reference into the Statement of Additional Information and is available upon
request.
24
<PAGE>
FINANCIAL HIGHLIGHTS
--------------------------------------------------------------------------
GOVERNMENT BOND FUND
The following financial highlights table is intended to help you understand the
Government Bond Fund's financial performance for the past five years. Certain
information reflects financial results for a single share outstanding throughout
each period shown. The total returns in the table represent the rate that an
investor would have earned (or lost) on an investment in the Government Bond
Fund (assuming reinvestment of all dividends and distributions) prior to
addition of multiple classes of shares, but do not reflect any sales loads that
would be imposed on the purchase or sale of any shares. This information is
derived from the financial statements of the Government Bond Fund, Class A, B
and C Shares, which for the period shown below has been audited by Tait, Weller
& Baker, CPA. The independent auditor's report, along with the Government Bond
Fund's financial statements, are incorporated by reference into the Statement of
Additional Information, which is available upon request.
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
CLASS A CLASS B CLASS C
SHARES SHARES SHARES
---------------- ---------------- ----------------
PERIOD FROM PERIOD FROM PERIOD FROM
JANUARY 1, 1999 JANUARY 1, 1999 JANUARY 1, 1999
TO TO TO
AUGUST 31, AUGUST 31, AUGUST 31,
---------------- ---------------- ----------------
1999 1999 1999
<S> <C> <C> <C>
- ----------------------------------------------------------------------------------------------
NET ASSET VALUE, BEGINNING OF
PERIOD $ $ $
------- ------- -------
------- ------- -------
- ----------------------------------------------------------------------------------------------
INCOME FROM INVESTMENT OPERATIONS
Net investment income
- ----------------------------------------------------------------------------------------------
Net realized and unrealized gain
(loss) on securities
- ----------------------------------------------------------------------------------------------
Total from investment operations
- ----------------------------------------------------------------------------------------------
LESS DISTRIBUTIONS
Dividends from net investment
income
- ----------------------------------------------------------------------------------------------
Total distributions
- ----------------------------------------------------------------------------------------------
NET ASSET VALUE, END OF PERIOD $ $ $
------- ------- -------
------- ------- -------
- ----------------------------------------------------------------------------------------------
TOTAL RETURN % % %
- ----------------------------------------------------------------------------------------------
RATIOS/SUPPLEMENTAL DATA
NET ASSETS, END OF PERIOD (000'S
OMITTED) $ $ $
- ----------------------------------------------------------------------------------------------
Ratio of expenses to average net
assets(1) % % %
- ----------------------------------------------------------------------------------------------
Ratio of net income to average net
assets % % %
- ----------------------------------------------------------------------------------------------
PORTFOLIO TURNOVER RATE % % %
- ----------------------------------------------------------------------------------------------
</TABLE>
(1) Expenses for the calculation are net of a reimbursement from Securities
Management and Research, Inc. Without this reimbursement, the ratio of
expenses to average net assets would have been % for the period ended
August 31, 1999.
25
<PAGE>
FINANCIAL HIGHLIGHTS
--------------------------------------------------------------------------
TAX FREE FUND
The following financial highlights table is intended to help you understand the
Tax Free Fund's financial performance since inception. Certain information
reflects financial results for a single share outstanding throughout each period
shown. The total returns in the table represent the rate that an investor would
have earned (or lost) on an investment in the Tax Free Fund (assuming
reinvestment of all dividends and distributions) prior to addition of multiple
classes of shares, but do not reflect any sales loads that would be imposed on
the purchase or sale of any shares. This information is derived from the
financial statements of the Tax Free Fund, Class A, B and C Shares, which for
the period shown below has been audited by Tait, Weller & Baker, CPA. The
independent auditor's report, along with the Tax Free Fund's financial
statements, are incorporated by reference into the Statement of Additional
Information, which is available upon request.
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
CLASS A CLASS B CLASS C
SHARES SHARES SHARES
---------------- ---------------- ----------------
PERIOD FROM PERIOD FROM PERIOD FROM
JANUARY 1, 1999 JANUARY 1, 1999 JANUARY 1, 1999
TO TO TO
AUGUST 31, AUGUST 31, AUGUST 31,
---------------- ---------------- ----------------
1999 1999 1999
<S> <C> <C> <C>
- ----------------------------------------------------------------------------------------------
NET ASSET VALUE, BEGINNING OF
PERIOD $ $ $
------- ------- -------
------- ------- -------
- ----------------------------------------------------------------------------------------------
INCOME FROM INVESTMENT OPERATIONS
Net investment income
- ----------------------------------------------------------------------------------------------
Net realized and unrealized gain
(loss) on securities
- ----------------------------------------------------------------------------------------------
Total from investment operations
- ----------------------------------------------------------------------------------------------
LESS DISTRIBUTIONS
Dividends from net investment
income
- ----------------------------------------------------------------------------------------------
Total distributions
- ----------------------------------------------------------------------------------------------
NET ASSET VALUE, END OF PERIOD $ $ $
------- ------- -------
------- ------- -------
- ----------------------------------------------------------------------------------------------
TOTAL RETURN % % %
- ----------------------------------------------------------------------------------------------
RATIOS/SUPPLEMENTAL DATA
NET ASSETS, END OF PERIOD (000'S
OMITTED) $ $ $
- ----------------------------------------------------------------------------------------------
Ratio of expenses to average net
assets(3) % % %
- ----------------------------------------------------------------------------------------------
Ratio of net income to average net
assets % % %
- ----------------------------------------------------------------------------------------------
PORTFOLIO TURNOVER RATE % % %
- ----------------------------------------------------------------------------------------------
</TABLE>
(1) Returns are not annualized.
(2) Ratios are annualized.
(3) Expenses for the calculation are net of a reimbursement from Securities
Management and Research, Inc. Without this reimbursement, the ratio of
expenses to average net assets would have been % for the period ended
August 31, 1999.
26
<PAGE>
FINANCIAL HIGHLIGHTS
--------------------------------------------------------------------------
PRIMARY FUND
The following financial highlights table is intended to help you understand the
Primary Fund's financial performance for the past five years. Certain
information reflects financial results for a single Primary Fund share
outstanding throughout each period shown. The total returns in the table
represent the rate that an investor would have earned (or lost) on an investment
in the Primary Fund (assuming reinvestment of all dividends and distributions).
This information is derived from the financial statements of the Primary Fund
which for the years ended through August 31, 1997 have been audited by KPMG Peat
Marwick LLP and for the years ended August 31, 1999 has been audited by Tait,
Weller & Baker, CPA. Each independent auditor's report, along with the Primary
Fund's financial statements, are incorporated by reference into the Statement of
Additional Information, which is available upon request.
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
YEAR ENDED AUGUST 31,
----------------------------------------------------
1999 1998 1997 1996 1995
<S> <C> <C> <C> <C> <C>
- -------------------------------------------------------------------------------
NET ASSET VALUE,
BEGINNING OF PERIOD $ $ 1.00 $ 1.00 $ 1.00 $ 1.00
-------- -------- -------- -------- --------
-------- -------- -------- -------- --------
- -------------------------------------------------------------------------------
INCOME FROM INVESTMENT
OPERATIONS
Net investment income 0.05 0.05 0.05 0.05
- -------------------------------------------------------------------------------
Total from investment
operations 0.05 0.05 0.05 0.05
- -------------------------------------------------------------------------------
LESS DISTRIBUTIONS
Dividends from net
investment income (0.05) (0.05) (0.05) (0.05)
- -------------------------------------------------------------------------------
Total distributions (0.05) (0.05) (0.05) (0.05)
- -------------------------------------------------------------------------------
NET ASSET VALUE, END OF
PERIOD $ $ 1.00 $ 1.00 $ 1.00 $ 1.00
-------- -------- -------- -------- --------
-------- -------- -------- -------- --------
- -------------------------------------------------------------------------------
TOTAL RETURN % 5.15% 4.98% 5.07% 5.01%
- -------------------------------------------------------------------------------
RATIOS/SUPPLEMENTAL DATA
NET ASSETS, END OF PERIOD
(000'S OMITTED) $ $34,577 $33,045 $37,465 $20,984
- -------------------------------------------------------------------------------
Ratio of expenses to
average net assets(1) % 0.80% 0.80% 0.81% 0.84%
- -------------------------------------------------------------------------------
Ratio of net income to
average net assets % 5.02% 4.86% 4.93% 4.91%
- -------------------------------------------------------------------------------
</TABLE>
(1) Expenses for the calculation are net of a reimbursement from Securities
Management and Research, Inc. Without this reimbursement the ratio of
expenses to average net assets would have been %, 0.98%, 1.01%, 1.15%,
and 1.21% for the years ended August 31, 1999, 1998, 1997, 1996, and 1995,
respectively.
27
<PAGE>
FINANCIAL HIGHLIGHTS
--------------------------------------------------------------------------
MONEY MARKET FUND
The following financial highlights table is intended to help you understand the
Money Market Fund's financial performance for the past five years. Certain
information reflects financial results for a single Money Market Fund share
outstanding throughout each period shown. The total returns in the table
represent the rate that an investor would have earned (or lost) on an investment
in the Money Market Fund (assuming reinvestment of all dividends and
distributions). This information is derived from the financial statements of the
Money Market Fund which has been audited by Tait, Weller & Baker, CPA. The
independent auditor's report, along with the Money Market Fund's financial
statements, are incorporated by reference into the Statement of Additional
Information, which is available upon request.
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
PERIOD FROM
JANUARY 1, 1999
TO
AUGUST 31,
----------------
1999
<S> <C>
- ---------------------------------------------------------------------
NET ASSET VALUE, BEGINNING OF PERIOD $
-------
-------
- ---------------------------------------------------------------------
INCOME FROM INVESTMENT OPERATIONS
Net investment income
- ---------------------------------------------------------------------
Total from investment operations
- ---------------------------------------------------------------------
LESS DISTRIBUTIONS
Dividends from net investment income
- ---------------------------------------------------------------------
Total distributions
- ---------------------------------------------------------------------
NET ASSET VALUE, END OF PERIOD $
-------
-------
- ---------------------------------------------------------------------
TOTAL RETURN %
- ---------------------------------------------------------------------
RATIOS/SUPPLEMENTAL DATA
NET ASSETS, END OF PERIOD (000'S OMITTED) $
- ---------------------------------------------------------------------
Ratio of expenses to average net assets %
- ---------------------------------------------------------------------
Ratio of net income to average net assets %
- ---------------------------------------------------------------------
</TABLE>
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IMPORTANT SHAREHOLDER FACTS AND INFORMATION
THIS SECTION OF THE PROSPECTUS IS PROVIDED TO HELP YOU BECOME FAMILIAR WITH THE
TYPES OF ACCOUNTS AND SERVICES AVAILABLE IN THE SM&R MUTUAL FUNDS. IT EXPLAINS
THE VARIOUS SERVICES AND FEATURES YOU CAN ESTABLISH AS PART OF YOUR ACCOUNT IN
THE "FUNDS" AS WELL AS ACCOUNT POLICIES AND FEES THAT MAY APPLY TO YOUR ACCOUNT.
WEB SITE: WWW.SMRINVEST.COM
BUSINESS HOURS:
8:00 A.M. TO 4:30 P.M. CENTRAL TIME
EACH DAY THE NEW YORK STOCK EXCHANGE IS OPEN FOR TRADING ("REGULAR
TRADING DAY")
24-HOUR ACCESS TO ACCOUNT INFORMATION. SEE "VOICE RESPONSE UNIT" UNDER
"OTHER SERVICES"
MAILING ADDRESS:
SECURITIES MANAGEMENT AND RESEARCH, INC.
P.O. BOX 58969
HOUSTON, TEXAS 77258-8969
OVERNIGHT MAILING ADDRESS AND STREET ADDRESS:
SECURITIES MANAGEMENT AND RESEARCH, INC.
2450 SOUTH SHORE BOULEVARD, SUITE 400
LEAGUE CITY, TEXAS 77573
IMPORTANT PHONE NUMBERS:
VOICE RESPONSE:
877-239-2049
INVESTOR SERVICES DEPARTMENT:
1-800-231-4639
FAX NUMBERS:
TRANSFER AGENCY:
1-281-538-4983
WIRING INSTRUCTIONS:
MOODY NATIONAL BANK OF GALVESTON
ABA #113100091
SECURITIES MANAGEMENT AND RESEARCH, INC.
#035 868 9
NAME OF CLASS AND FUND (E.G. CLASS A OF THE GOVERNMENT BOND FUND)
FUND ACCOUNT NUMBER (NUMBER APPEARS ON YOUR CONFIRMATION STATEMENT)
YOUR NAME (E.G., MARY SMITH)
THIRD PARTY CHECKS
To prevent fraud, SM&R will not accept checks made payable to third parties to
open new accounts. Tax-deferred rollover checks, properly endorsed, will be
accepted.
MINIMUM INVESTMENT AMOUNTS:
The Funds' low investment minimums make investing easy. Once you decide on a
fund, an investment amount, and a share class simply talk to your
representative or broker-dealer, or fill out an application and send in your
investment.
The Funds reserve the right to change the amount of these minimums from time
to time or to waive them in whole or in part for certain types of accounts.
<TABLE>
<CAPTION>
INITIAL ADDITIONAL
<S> <C> <C>
Regular Accounts $ 100 $ 20
Automatic Investment Plan $ 100 $ 20
Retirement Plans $ 100 $ 20
Primary and Money Market Funds $ 1,000 $100
</TABLE>
CERTIFICATES
Share certificates are not issued by the Funds. Your purchases are maintained
on the records of the Funds in book shares. This provides you with easy access
to your shares. You have the same rights of share ownership as you would if
certificates had been issued.
SPECIAL FEES:
- Tax-deferred: $7.50 per account deducted annually
- Wiring fee: $10.00 for wire redemption proceeds under $10,000
SIGNATURE GUARANTEE REQUIREMENTS:
Required on all redemptions in amounts of $50,000 or more. Other requirements
apply, see page .
CHECK WRITING OPTION:
Available in the SM&R Money Market Fund only. Refer to "Important Facts About
Redeeming"
TELEPHONE SERVICES:
SM&R will automatically establish a telephone redemption/exchange option for
all non-qualified and non-tax deferred accounts, unless you instruct us not to
do so. THESE SERVICES ARE NOT AVAILABLE TO PARTICIPANTS OF POST-SECONDARY
EDUCATION PROGRAMS. Refer to "Telephone Services"
PLEASE KEEP IN MIND THAT THE ACCOUNT POLICIES (INCLUDING FEES), SERVICES AND
FEATURES MAY BE MODIFIED OR DISCONTINUED WITHOUT SHAREHOLDER APPROVAL OR PRIOR
NOTICE. DURING TIMES OF ECONOMIC TURMOIL OR MARKET VOLATILITY, SEVERE WEATHER,
OR NATURAL DISASTER YOU MAY NOT BE ABLE TO REACH SM&R BY TELEPHONE TO INSTITUTE
A REDEMPTION OR EXCHANGE.
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TYPES OF ACCOUNTS AVAILABLE
BELOW IS A BRIEF EXPLANATION OF THE DIFFERENT ACCOUNTS AVAILABLE IN THE FUNDS.
INDIVIDUAL OR JOINT OWNERSHIP
Individual accounts are owned by one person. Joint accounts have two or more
owners.
A UNIFORM GIFT OR TRANSFER TO MINOR (UGMA OR UTMA)
An UGMA/UTMA account is a custodial account managed for the benefit of a
minor. To open an UGMA or UTMA account, you must include the minor's Social
Security number on the application.
TRUST
An established trust can open an account. The names of each trustee, the
name of the trust and the date of the trust agreement must be included on
the application.
BUSINESS ACCOUNTS
Corporations, partnerships, and sole proprietorships may also open an
account. The application must be signed by an authorized officer of the
corporation or a general partner or owner of the business.
TAX-DEFERRED ACCOUNTS
If you are eligible, you may set up one or more tax-deferred accounts. A
tax-deferred account allows you to shelter your investment income and capital
gains from current income taxes, while saving for retirement. A contribution
to certain types of these plans may also be tax deductible. Tax-deferred
accounts include retirement plans described below and the Education IRA.
Distributions from these plans are generally subject to income tax and may be
subject to an additional tax if withdrawn prior to age 59 1/2 or used for a
non-qualifying purpose. Information concerning IRAs and TSAs, and the forms
necessary to adopt such plans, can be obtained by contacting your registered
representative, your broker-dealer, or by calling SM&R. Investors should
consult their tax adviser or legal counsel before selecting a tax-deferred
account.
Because IRAs, SEPs, TSAs, and other tax-deferred accounts are exempt from
federal income tax, they will not benefit from the tax-exempt nature of the
Tax Free Fund. Accordingly, the Tax Free Fund is not considered to be suited
for these types of accounts.
Securities Management and Research, Inc. serves as custodian for the
tax-deferred accounts offered by the funds. You will be charged an annual
account maintenance fee of $7.50 for each tax-deferred account you have. The
fee will be automatically deducted from your account (usually in the last
quarter). The custodian reserves the right to change the amount of this fee or
to waive it in whole or in part for certain types of accounts.
TRADITIONAL INDIVIDUAL RETIREMENT ACCOUNTS
Traditional IRAs allow most individuals with earned income to contribute up
to the lesser of $2000 or 100% of compensation annually.
ROTH INDIVIDUAL RETIREMENT ACCOUNTS
Roth IRAs allow most individuals with earned income to contribute up to the
lesser of $2000 or 100% of compensation annually.
EDUCATION IRA
This plan allows individuals, subject to certain income limitations, to
contribute up to $500 annually per child under the age of 18.
SIMPLIFIED EMPLOYEE PENSION PLAN
This plan allows small business owners (including sole proprietors) to make
tax-deductible contributions for themselves and any eligible employee(s). A
SEP requires an IRA (a SEP-IRA) to be set up for each SEP participant.
SIMPLE
This plan allows employee pre-tax contributions up to $6,000 annually and
may be matched by the employer up to a maximum of 3% of employees'
compensations.
PROFIT SHARING OR MONEY PURCHASE PENSION PLAN
These plans are open to corporations, partnerships and sole proprietors to
benefit their employees and themselves.
SECTION 403(b)(7) PLAN
Employees of educational organizations or other qualifying, tax-exempt
organizations may be eligible to participate in a Section 403(b)(7) Plan.
30
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PRICING OF FUND SHARES
GENERAL (HOW SHARES ARE PRICED). Each Fund's offering price is calculated once
each day the New York Stock Exchange (the "Exchange") is open for regular
trading. The offering price equals a fund's net asset value plus the sales
charge, if any, computed at the rate set forth in the applicable tables for
the classes. (See "Sales Charge Reductions and Waivers.") You may purchase
shares of the SM&R Primary Fund and SM&R Money Market Fund without a sales
charge. Accordingly, the offering price for shares of these funds is net asset
value. Although the legal rights of the Class A, B, and C shares are
substantially identical, the different expenses borne by each class will
result in different net asset values and dividends. The net asset value of the
Class B and C shares generally will be lower than the Class A shares as a
result of differences in service and distribution (12b-1) fees charged.
A NOTE ON PRICING. The Government Bond, Tax Free and Primary Fund's investments
will be priced at their market value when market quotations are readily
available. When these quotations are not readily available, investments will
be priced at their fair value, calculated according to procedures adopted by
the Funds' Board of Directors. The Funds also may use fair value pricing if
the value of a security held by the Fund is materially affected by events
occurring after the close of regular trading of the primary markets or
exchanges on which the security is traded. In these situations, prices used by
the Fund to calculate its net asset value may differ from quoted or published
prices for the underlying securities. The Money Market Fund uses the amortized
cost method for valuing its securities.
SHARE PRICE -- EFFECTIVE DATE OF PURCHASES AND REDEMPTIONS. Each Fund's share
price, called its net asset value, or NAV, is calculated once each day at the
close of regular trading (currently 3:00 p.m. Central Time). NAV is not
calculated on holidays or other days the Exchange is closed. In the event the
Exchange closes early on a particular day, we will determine the net asset
value of the Funds as of such earlier closing time. Below is the method used
by the Funds to calculate the NAV on any given day.
<TABLE>
<S> <C> <C>
Total Assets - Liabilities
Net Asset Value = --------------------------
Number of Shares Outstanding
</TABLE>
Knowing the daily net asset value is useful to you as a shareholder because it
indicates the current value of your investment. Each Fund's NAV, multiplied by
the number of shares you own, gives you the dollar amount you would have
received had you sold all of your shares back to the Fund that day.
The price you pay or receive for shares of a Fund depends, in part, on the day
and time you make your purchase or redemption. Purchases and redemptions will be
executed on each day the Exchange is open for regular trading at the next NAV
determined THAT DAY if:
- SM&R receives your request in good order prior to the close of the regular
trading day;
- a securities dealer having a dealer contract with SM&R receives your order
prior to the close of the regular trading day and reports your order to
SM&R prior to SM&R's close of business (currently 4:30 p.m. Central Time)
on the same day; or
- SM&R is advised of bank wire purchases received by Moody National Bank
before 3 p.m. Central Time.
If we receive your order after the close of the regular trading day or on any
day that the Exchange is closed, we will execute your purchase or redemption
at the price determined on the next regular trading day. In unusual
circumstances, the Funds may temporarily suspend the processing of sale
requests, or may postpone payment of proceeds for up to three business days or
longer, as allowed by federal securities laws.
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HOW TO PURCHASE SHARES
YOU SHOULD REFER TO THE FIRST PAGE OF THIS SHAREHOLDER'S GUIDE "IMPORTANT
SHAREHOLDER FACTS AND INFORMATION" FOR THE APPROPRIATE ADDRESSES AND TELEPHONE
NUMBERS.
<TABLE>
<CAPTION>
METHOD OPENING AN ACCOUNT ADDING TO AN ACCOUNT
<S> <C> <C>
- --------------------------------------------------------------------------------------------------------------------------------
BY MAIL OR THROUGH A - Determine the Fund and the Class in which you - Make your check payable to SM&R.
REGISTERED want to invest. - Use the investment slip on your confirmation, or
REPRESENTATIVE - Complete and sign the account application - Write a note specifying:
- Make the check payable to SM&R. -- Your account number
- Mail the application and your check to SM&R at -- The Fund name
the address on the first page of this guide. -- Share class
- Or deliver the information to your -- The name(s) in which the account is
representative (provided he or she has a registered.
broker-dealer arrangement with SM&R). - Mail to the address indicated on the cover page
of this guide.
- --------------------------------------------------------------------------------------------------------------------------------
BY PHONE WIRE - Call Investors Services to obtain a reference - Call Investors Services at the number on the
number (call by noon, Central Time, if you want first page of this guide, on any business day.
wired funds to be credited that day). - You can send your investment either by:
Instruct your bank to wire or transfer your -- Federal Funds Wire (offers immediate access
purchase (your bank may charge a wiring fee) to funds), or
using the information on the first page of -- Electronic transfer via ACH which avoids
this guide. wiring fees, if your bank account is set up
- Complete the account application and mail to the on file
appropriate address.
- Wires received before 3:00 p.m. Central Time on
regular trading days will receive that day's
closing price (if not, you will receive the next
trading day's closing price).
- --------------------------------------------------------------------------------------------------------------------------------
BY EXCHANGE - You can make an additional investment by exchange from an existing fund in the SM&R Mutual Funds to an
existing account by calling Investor Services.
- You can only exchange shares in the same class with identical registrations.
- There is no sales charge or redemption fee when exchanging funds within the SM&R Mutual Funds.
- Orders placed before 3 p.m. Central Time on regular trading days will receive that day's closing price
(if not, you will receive the next regular trading day's closing price).
- Exchanges are limited to three per calendar quarter, and twelve per calendar year.
- Exchanges between accounts that do not have identical ownership registration must be made in writing.
- Be sure you read the prospectus for the fund into which you are exchanging.
KEY POINT: AN EXCHANGE REPRESENTS THE SALE OF SHARES OF ONE FUND AND THE PURCHASE OF SHARES OF ANOTHER
FUND. THIS TRANSACTION MAY PRODUCE A TAXABLE GAIN OR LOSS IN A NON-TAX DEFERRED ACCOUNT.
- --------------------------------------------------------------------------------------------------------------------------------
AUTOMATIC INVESTMENT - You can transfer money automatically from your - To establish automatic investing for an existing
PLAN THROUGH THE bank account into your Fund account on a monthly account, call Investor Services for an
AUTOMATED CLEARING basis. application.
HOUSE (ACH) - Initial investment minimum is $100 if you invest - The minimum is $20.
at least $20 per month with this service.
- To enroll, check off the box on the account
application and provide:
1. Your bank account information,
2. The amount and date of your monthly
investment, and
3. A voided check.
- --------------------------------------------------------------------------------------------------------------------------------
</TABLE>
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HOW TO REDEEM SHARES
You have several convenient ways for you to redeem your shares in any of the
SM&R Mutual Funds redemptions will be at net asset value, plus any applicable
CDSC, which is determined on the date your request is received by SM&R in good
order.
<TABLE>
<CAPTION>
METHODS REQUIREMENTS
<S> <C>
- --------------------------------------------------------------------------------------------------------------------------
CALL US - Call Investor Service during normal business hours on any business day.
- This service is only available for those accounts which are non-qualified and non-tax deferred:
1. The amount requested is $500 or more per account
2. The amount is less than $50,000 in aggregate
3. The proceeds are to be mailed to the address of record or electronically transferred to the
bank account indicated on your fund account.
4. There has been no change of address for either you or your bank for 30 days
5. Telephone services have not been declined.
6. The security procedures discussed on page 37 of this guide have been met.
7. There are no outstanding certificate shares on the account.
- All authorized requests received before 3:00 p.m. Central Time on regular trading days will be
processed at that day's closing price. Requests received after 3:00 p.m. will be processed the
following regular trading day.
- We can either:
-- wire the proceeds the next business day into your bank account of record (service charges may
apply)
-- electronically transmit the proceeds to your bank account of record via the ACH service
-- mail you a check
- All telephone calls are recorded for your protection. We are not responsible for acting on
telephone orders we believe to be genuine. (Refer to "Security Procedures")
- See exceptions below for requests that must be made in writing.
- A $10.00 fee is charged for redemptions by wire under $10,000.
- To redeem from a tax-deferred account, call Investor Services for a special withdrawal form.
- --------------------------------------------------------------------------------------------------------------------------
WRITE US - You can mail a redemption request to the appropriate address listed on the first page of this
guide.
- Your letter of instruction must:
-- list your account number and the fund name
-- indicate the number of shares or dollar value you wish to redeem
-- be signed by the registered owner(s)
-- include any outstanding share certificates issued prior to January 1, 1999
-- include special withdrawal forms for tax deferred accounts
- Refer to "Signature Guarantee" below for requests that must be signature guaranteed.
- --------------------------------------------------------------------------------------------------------------------------
FAX US You may fax your request for redemption from a non-qualified and non-tax deferred account, if your
request meets requirements stated in 2-7 under "Call Us" above. Your fax requests must be received
by SM&R before 3:00 p.m. Central Time on regular trading days to receive that day's price.
- --------------------------------------------------------------------------------------------------------------------------
SELL YOUR SHARES IN You may also redeem your shares by coming to SM&R's home office, and deliver your request in person
PERSON prior to 3:00 p.m. Central Time on regular trading days to receive that day's price.
- --------------------------------------------------------------------------------------------------------------------------
SYSTEMATIC You can withdraw money automatically from your Fund account on a monthly, quarterly, semi-annual,
WITHDRAWAL PLAN and annual basis -- without redemption fees -- on or about the 20th of the month and if:
(SWP) - Your account value is $5,000 or more
- You complete the relevant section of the application
- The withdrawal can be mailed to you at your address of record, or deposited directly to your
bank account via ACH
The minimum withdrawal is $50 per month.
To obtain proper forms, contact Investor Services.
See "Important Facts About Redeeming" for more information.
- --------------------------------------------------------------------------------------------------------------------------
</TABLE>
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PAYMENT OF REDEMPTION PROCEEDS
Normally, redemption proceeds of shares you purchased by wire, certified check,
money order, or other immediately available funds will be mailed no later than
the 7th calendar day following receipt of your redemption request. Redemptions
of shares recently purchased by a personal check or ACH transfer will generally
be delayed for up to ten (10) business days to allow the check or transfer to
clear.
We reserve the right to redeem "in kind" by paying you the proceeds of a
redemption in securities rather than in cash.
SIGNATURE REQUIREMENTS BASED ON ACCOUNT TYPE
<TABLE>
<S> <C>
INDIVIDUAL OR JOINT TENANTS Written instructions must be signed by each
shareholder, exactly as the names appear in the
account registration.
UGMA OR UTMA Written instructions must be signed by the
custodian in his/her capacity as it appears in the
account registration until the minor reaches the
age of majority as defined by the state in which
the UGMA or UTMA was established.
SOLE PROPRIETOR, GENERAL PARTNER Written instructions must be signed by an
authorized individual in his/her capacity as it
appears on the account registration.
CORPORATION, ASSOCIATION Written instructions must be signed by the
person(s) authorized to act on the account. In
addition, a certified copy of the corporate
resolution authorizing the signer to act must
accompany the request.
TRUST Written instructions must be signed by the
trustee(s). If the name of the current trustee(s)
does not appear on the account application, a
current certificate of incumbency dated within 60
days must also be submitted.
IRA OR TSA A special withdrawal form must be signed by the
(INCLUDES ALL TYPES OF IRAS) account owner, and you may obtain this form by
contacting Investor Services at the number on the
first page of this guide. If you do not want
federal income tax withheld from your redemption,
you must state that you elect not to have such
withholding apply. In addition, your instructions
must state whether the distribution is normal
(after age 59 1/2) or premature (before age
59 1/2) and, if premature, whether any exceptions
such as death or disability apply with regard to
the 10% additional tax on early distributions.
EXECUTORS OF SHAREHOLDER ESTATES Written instructions must be signed by the
executor. A copy of the order appointing the
executor, certified within the past 12 months must
accompany the letter of instructions. A signature
guarantee must be provided as discussed below.
</TABLE>
SIGNATURE GUARANTEE
To protect you and the Funds against fraud, certain redemption requests must be
made in writing with your signature guaranteed. A signature guarantee can be
obtained at most banks and securities dealers. A notary public is not authorized
to provide a signature guarantee.
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<TABLE>
<S> <C>
The following circumstances require a signature guarantee: WHO CAN PROVIDE A SIGNATURE GUARANTEE:
- - Redemptions from one or more of the Funds total $50,000 or - Commercial Bank
more - Trust Company
- - You want the proceeds sent to an address other than the - Savings Association
address currently appearing on your account - Credit Union
- - You want the proceeds sent to a bank account not listed on - Member of Medallion Program
your account - Member of a U.S. Stock Exchange
- - You want the proceeds payable to anyone other than the - Authorized SM&R Representatives
registered owner(s) of the account
- - Either your address or the address of your bank account has NOTARY PUBLIC NOT ACCEPTABLE
been changed within 30 days
- - The account is registered in the name of a fiduciary,
corporation or any other organization. In these cases,
additional documentation is required:
Corporate accounts: certified copy of corporate resolution
Fiduciary accounts: copy of the power of attorney or other
governing document
- - The Funds or their transfer agent believe a signature
guarantee would protect against claims based on transfer
instructions
</TABLE>
IMPORTANT FACTS ABOUT REDEEMING
SYSTEMATIC WITHDRAWAL PLAN. It may not be advisable for shareholders to
maintain a Withdrawal Account while concurrently purchasing shares of the Fund
because of the sales charge or CDSC (as applicable) involved in additional
purchases. See "Class B Waivers of Contingent Deferred Sales Charges" for a
discussion of the CDSC waivers available. You should carefully consider such
purchases and contact your representative regarding their advisability. While
you are participating in a Systematic Withdrawal Plan dividends and capital
gains distributions will automatically be reinvested in additional shares at
net asset value. As with other redemptions, a withdrawal is a sale for federal
income tax purposes. The Systematic Withdrawal Plan will automatically
terminate if all shares are liquidated or withdrawn from the account. No
account covered by a Letter of Intent can be changed to a Systematic
Withdrawal Plan until such time as the Letter of Intent is fulfilled or
terminated, nor can an account under a Systematic Withdrawal Plan be placed
under a Letter of Intent. Retirement Plan Accounts are subject to special
withdrawal requirements. Call Investor Services for assistance.
REINVESTMENT PRIVILEGE. Within ninety (90) days of a redemption (60 days for
tax-deferred plans) of Class A or Class T shares of a Fund, a shareholder may
reinvest all or part of the proceeds in the same class of the same Fund from
which the redemption was processed at the net asset value next computed after
receipt of the proceeds to be reinvested by SM&R. THE SHAREHOLDER MUST ASK THE
TRANSFER AGENT FOR THIS PRIVILEGE AT THE TIME OF REINVESTMENT. Prior to
reinvestment of redemption proceeds, a shareholder is encouraged to consult
with his or her accountant or tax advisor to determine any possible tax
ramifications of such a transaction. Each Fund managed by SM&R may amend,
suspend, or cease offering this privilege at any time as to shares redeemed
after the date of the amendment, suspension, or cessation. For further
information about the "Systematic Withdrawal Plan" and "Reinvestment
Privilege," contact your registered representative, your broker-dealer or
SM&R.
"GOOD ORDER" means the request for redemption must include:
(1) your letter of instruction or a stock assignment specifying the fund,
account number, and number of shares or dollar amount to be redeemed.
The letter of instruction and stock powers must be signed and executed
exactly as the fund shares are registered and any outstanding share
certificates returned. It is suggested that certificates be returned by
certified mail for your protection;
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(2) any required signature guarantees (see "Signature Guarantees" above);
and
(3) other supporting legal documents, if required, in the case of estates,
trusts, guardianships, divorce, custodianships, corporations,
partnerships, pension or profit sharing plans, retirement plans and
other organizations.
Please keep in mind that it is your responsibility to ensure that all requests
are submitted to the Fund's transfer agent in good order for processing.
TEXAS OPTIONAL RETIREMENT PROGRAM. You may not redeem shares in any account
established under the Texas Optional Retirement Program, unless SM&R receives
satisfactory evidence from the state that one of the following conditions
exist:
(1) death of the employee;
(2) termination of service with the employer; or
(3) retirement of employee.
CHECK WRITING OPTION. Check writing is available in the Money Market Fund to
investors having an account value of $1,000 or more. $250 is the minimum check
amount under the check writing option. This option is not available on any
tax-deferred accounts (IRAs, TSAs, etc.). Shareholders desiring this option
must complete the check writing option signature card on the application.
After obtaining specimen signatures and the fully executed card, SM&R will
order checks and forward to you at the address of record. Investments made by
personal check or third party check will be held for fifteen (15) business
days following the investment during which time checks may not be drawn on the
amount of such investment.
When a check is presented for payment, SM&R as the shareholder's agent, will
cause each fund to redeem a sufficient number of full and fractional shares to
cover the amount of the check. Shareholders will continue to be entitled to
dividends on their shares up to the time the check is presented to SM&R for
payment. If the amount of the check is greater than the value of shares held
in the shareholder's account for more than fifteen (15) business days at the
time the check is presented for payment, the check will not be honored and
returned to the payee and the shareholder may be subject to extra charges as a
result.
Primary Fund shareholders with check writing privileges prior to December 31,
1998 will be permitted to continue writing checks on the Primary Fund subject
to the terms applicable to the Money Market Fund described above. SHAREHOLDERS
USING THE PRIMARY FUND CHECK WRITING OPTION SHOULD BE AWARE THAT WRITING A
CHECK IS A REDEMPTION OF SHARES. THOSE SHARES MAY BE WORTH LESS WHEN THE CHECK
IS PRESENTED FOR PAYMENT THAN WHEN THE CHECK WAS WRITTEN.
This service may be terminated or suspended or additional charges may be
imposed for this service. Shareholders will be provided the initial checkbook
free of charge. There will be a $5 fee for reorders. Shareholders will be
allowed to write ten (10) checks free each calendar quarter. You may be
charged $1.00 for each check written over the 10 check limit.
REDEMPTION OF SMALL ACCOUNTS. The Funds reserve the right to redeem shares in
any account (which will be promptly paid to the shareholder) if, due to your
redemptions, the value of the account falls below $500. You will be notified
that the value of your account is less than the required minimum indicated
above and allowed at least 60 days to make an additional investment to
increase the value of your account above the required minimum. The Funds may,
from time to time, change such required minimum investment.
TRANSACTIONS THROUGH PROCESSING ORGANIZATIONS:
You may also purchase or sell shares of the Funds through a broker-dealer, bank
or other financial institution, or an organization that provides recordkeeping
and consulting services to 401(k) plans or other employee benefit plans (a
"Processing Organization"). Processing Organizations may charge you a fee for
this service and may require different minimum initial and subsequent
investments than the Funds. Processing Organizations may also impose other
charges or restrictions different from those applicable to shareholders who
invest in the Funds directly. If you utilize a Processing Organization the Funds
are
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not responsible for failure of any Processing Organization to carry out its
obligations to its customers. YOU MAY NOT BE CONSIDERED THE SHAREHOLDER OF
RECORD OF YOUR SHARES. THEREFORE, YOU MAY NOT BE ABLE TO UTILIZE SERVICES
AVAILABLE ONLY TO SHAREHOLDERS OF THE FUNDS. YOU SHOULD KEEP THIS IN MIND WHEN
ESTABLISHING AN ACCOUNT IN ANY FUND.
OTHER SERVICES
In addition to the plans described under "Sales Charge Reductions and Waivers,"
that permit you to reduce the initial sales charge assessed on Class A shares or
the CDSC on Class B shares, the Funds offer other services and plans described
below. At this time, there is no charge to you for these services. The Funds may
impose fees for such services in the future. Be aware, however, that if you
elect to participate in the electronic transfers (ACH) plan described below, you
should check with your financial institution for any additional charges imposed
by them for this service. For additional information on these plans and services
you should contact your registered representative, broker-dealer or SM&R. Before
beginning any of the plans or services described below you should consult a tax
advisor.
ELECTRONIC TRANSFERS (ACH). The electronic transfer option allows you to move
money between your account(s) and your bank, savings and loan, or credit union
account using Automated Clearing House ("ACH") network. To arrange for
electronic transfers, complete the relevant Special Investor Services section
of the account application at the time you open your account and specify the
type of service or services desired. Attach a voided, pre-printed check or
deposit slip from your bank, savings and loan, or credit union account. YOUR
FINANCIAL INSTITUTION MUST BE A MEMBER OF THE AUTOMATED CLEARING HOUSE (ACH)
NETWORK FOR YOU TO TAKE ADVANTAGE OF THIS SERVICE.
TELEPHONE SERVICES. You can only use telephone services for transaction amounts
of $500 or more. Through this service, you will be able to purchase additional
shares for an existing SM&R mutual fund account by ACH. You may also use the
telephone services to redeem and exchange shares on those accounts for which
you have an executed account application on file. If you initially choose not
to have this option and wish to establish it at a later date, it would be
necessary for you to complete the required form requesting this option. For
example, we permit exchanges by telephone from a joint account only to another
joint account registered in the identical names. There may be additional
restrictions on telephone transactions by joint account owners. Contact your
registered representative for more information. PLEASE NOTE THAT THE TELEPHONE
REDEMPTION OPTION IS NOT AVAILABLE FOR QUALIFIED AND TAX-DEFERRED ACCOUNTS.
While telephone redemption is easy and convenient, this account feature involves
risk of loss from unauthorized or fraudulent transactions. SM&R will take
reasonable precautions to protect your account from fraud. You should do the
same by keeping your account information private, and by immediately reviewing
any account statements that we send to you. Make sure to contact SM&R's
Investors Services Department immediately about any transaction you believe to
be unauthorized.
SECURITY PROCEDURES
TELEPHONE TRANSACTIONS
The Funds have implemented the following security procedures intended to
protect your account from losses resulting from unauthorized or fraudulent
telephone instructions: The caller must know:
(i) the name of the fund or funds;
(ii) all digits of the account number;
(iii) the exact name and address used in the registration(s); and
(iv) the Social Security or Employer Identification Number listed on the
account(s).
Anyone with the required account information indicated above (including your
broker) can request a telephone transaction in your account. All calls are
recorded and/or monitored for verification, record keeping and
quality-assurance purposes. Requested proceeds will be forwarded only to an
address or bank account designated on the account at the time of the
transaction.
VOICE RESPONSE UNITS
The Funds now have available to shareholders a means by which they can access
account information, fund prices, and take advantage of other
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features 24-hours a day. To obtain account information you will be required to
know your fund number, account number, and your PIN number. As indicated under
"Telephone Services" above, you should keep your account information private.
We also suggest that you change your PIN number periodically and not provide
the number to anyone.
Neither the Funds nor SM&R will be responsible for the authenticity of
transaction instructions received by telephone or through the voice response
unit that comply with the current security procedures and other requirements.
SM&R believes that such security procedures and other requirements are
reasonable.
During times of economic turmoil or market volatility, severe weather, or
natural disaster you may not be able to reach SM&R by telephone to institute a
redemption or exchange.
For additional restrictions refer to "Exchange Privilege" below.
AUTOMATIC DIVIDEND INVESTMENT. Your dividends and distributions may be paid in
cash or invested in any SM&R Mutual Fund at net asset value. Unless you
specify otherwise, your dividends and distributions will automatically be
reinvested in the same SM&R Mutual Fund. You may invest your dividends and
distributions (1) into another SM&R Mutual Fund in the same class of shares;
or (2) from Class A shares into SM&R Money Market Fund, or vise versa.
You must comply with the following requirements to invest your dividends and
distributions in shares of another SM&R Mutual Fund:
(1) Your account balance (a) in the SM&R Mutual Fund paying the dividend
must be at least $5,000; and (b) the SM&R Mutual Fund receiving the
dividend must have an account balance of at least $500.
(2) Both accounts must have identical registration information, that is they
cannot be in different names; and
(3) You must have elected, in writing, to reinvest dividends into another
SM&R Mutual Fund.
AUTOMATIC INVESTMENT PLAN. Through this plan, a specified amount is
electronically transferred (via ACH) from your bank account and invested
monthly, bi-monthly, quarterly, or annually into the designated fund(s) at the
applicable offering price determined on the date of the electronic transfer.
GROUP SYSTEMATIC INVESTMENT PLAN. SM&R can establish a Group Systematic
Investment Plan with an employer having 5 or more participants under a single
payroll deduction arrangement. Under this investment plan there is a minimum
investment of $20 per individual. Any such plan may be terminated by SM&R or
the shareholder at any time upon sixty (60) days written notice. However, all
other investment amount minimums apply. Contact SM&R for further information
regarding these plans.
EXCHANGE PRIVILEGE. As an investor in the Funds, you may be permitted to
exchange shares that you own for shares of other mutual funds managed by SM&R
without the payment of an exchange fee, subject to certain conditions.
EXCHANGES BETWEEN A FUND AND ANOTHER FUND MANAGED BY SM&R ARE AVAILABLE ONLY
IN STATES WHERE THE APPLICABLE FUNDS ARE REGISTERED AND THE EXCHANGE MAY BE
LEGALLY MADE. YOU SHOULD CONTACT SM&R TO DETERMINE WHETHER A FUND IS
REGISTERED IN A PARTICULAR STATE AND WHETHER AN EXCHANGE IS PERMITTED.
WE RESERVE THE RIGHT TO TERMINATE OR CHANGE THE TERMS OF ANY EXCHANGE
PRIVILEGE AT ANY TIME.
You may exchange Class A, Class B, or Class C shares that you own in the Tax
Free and Government Bond Funds, without an exchange fee or sales charge, for
shares of the corresponding class of another fund managed by SM&R. You also
may exchange your Class A or Class B shares for shares of the Primary or Money
Market Fund, subject to two conditions:
- any applicable CDSC period has expired on the shares you wish to exchange
(I.E., 13 months in the case of Class A share purchases of $1 million or
more and 6 years in the case of Class B share purchases), and
- you meet any minimum investment requirement for the shares you wish to
acquire.
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You CANNOT exchange Class C shares for shares of the Money Market Fund or
Primary Fund.
We waive any sales charges on Class A and Class T shares acquired through an
exchange if you previously paid a sales charge on amounts invested in those
shares. For example, assume you purchase Class A shares of an Equity Income
Fund. You then exchange your Class A shares for shares of the Money Market
Fund. Later, you re-exchange those shares of the Money Market Fund for Class A
shares of the Tax Free Fund. We would not impose any sales charge upon the
re-exchange into Class A shares of the Tax Free Fund because you previously
paid a sales charge on amounts invested in those shares. In other words, we
will never impose a front-end sales charge on the same investment TWICE.
Shares of any fund managed by SM&R held in escrow under a Letter of Intent are
not eligible for the exchange privilege. Such shares will not be released from
escrow until the balance invested during the period specified in the Letter of
Intent equals or exceeds the amount required to be invested under the Letter
of Intent or the shareholder requests, in writing, that the Letter of Intent
be canceled and pays any adjustments in sales charge. After release from
escrow, shares may be exchanged, provided all other applicable conditions are
met.
You may request an exchange by telephone or in writing. In order to exchange
shares, the following requirements must be met:
(a) the exchange must be made between accounts that are registered in the
same name, address and, if applicable, taxpayer identification number;
(b) the shares of the Fund acquired through exchange must be qualified for
sale in the state in which you reside;
(c) the dollar amount of a written exchange must meet the minimum investment
requirement applicable to the shares of the fund that you would acquire
through the exchange;
(d) the minimum dollar amount of a telephone exchange is $500;
(e) SM&R must have received full payment for the shares being exchanged;
(f) your account must have been coded to reflect your certified taxpayer
identification number, or, if applicable, an appropriate Internal
Revenue Service Form W-8 (certificate of foreign status) or Form W-9
(certifying exempt status);
(g) any shares that you wish to exchange must have been held for at least
ten (10) business days; and
(h) you have received a prospectus for the fund shares you receive in the
exchange.
You may exchange shares you own in the Primary Fund for shares of the Money
Market Fund, and vise versa. You may exchange shares you own in the Primary or
Money Market Fund for Class A, T, J, or Y shares of a class of another fund
managed by SM&R, provided you meet any eligibility requirements and pay any
sales charge applicable to the acquired shares. You CANNOT exchange shares of
the Money Market Fund or Primary Fund for Class B or C shares of another fund.
The exchange privilege is not an option or right to purchase shares but is
permitted under the respective policies of the participating funds, and may be
modified or discontinued by the participating funds or by SM&R at any time.
ANY GAIN OR LOSS REALIZED ON AN EXCHANGE OR RE-EXCHANGE MAY BE RECOGNIZED FOR
FEDERAL AND STATE INCOME TAX PURPOSES. YOU SHOULD CONSULT YOUR TAX ADVISOR FOR
THE TAX TREATMENT AND EFFECT OF EXCHANGES.
AUTOMATIC CONVERSIONS. Class B shares convert automatically to the appropriate
number of Class A shares of equal dollar value after the investor has owned
the Class B shares for eight (8) years. Dividends and other distributions paid
to an investor in the form of additional Class B shares also convert to Class
A shares on a pro-rata basis. The conversion benefits shareholders because
Class A shares are subject to a lower ongoing 12b-1 fee. If an investor
exchanges Class B shares of a fund for Class B shares of another fund managed
by SM&R, the purchase date of the original investment will be used to
determine the appropriate conversion date.
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ABUSIVE TRADING PRACTICES. Excessive, short-term (market-timing) or other
abusive trading practices may disrupt portfolio management strategies and harm
fund performance. To minimize harm to the Fund and its shareholders, we
reserve the right to reject any purchase order (including exchanges) from any
investor we believe has a history of abusive trading or whose trading, in our
judgement, has been or may be disruptive to a fund. In making this judgement,
we may consider trading done in multiple accounts under common ownership or
control.
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DISTRIBUTIONS AND TAXES
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DISTRIBUTION SCHEDULE. The following schedule of distributions is provided to
let you know when you can expect to receive a distribution from the SM&R
Mutual Funds you own. These distributions, under normal circumstances and if
earned, will be declared and paid in the months indicated in the following
chart.
<TABLE>
<CAPTION>
DIVIDENDS CAPITAL GAINS
DECLARED PAID
<S> <C> <C>
SM&R GROWTH FUND June and December
December
- ----------------------------------------------------
SM&R EQUITY March, June, December
INCOME FUND September,
December
- ----------------------------------------------------
SM&R BALANCED March, June, December
FUND September,
December
- ----------------------------------------------------
SM&R GOVERNMENT Monthly December
BOND FUND
- ----------------------------------------------------
SM&R TAX FREE Monthly December
FUND
- ----------------------------------------------------
SM&R PRIMARY Daily paid December
FUND Monthly
- ----------------------------------------------------
SM&R MONEY Daily paid --
MARKET FUND Monthly
- ----------------------------------------------------
</TABLE>
DISTRIBUTIONS AND TAXABILITY. To avoid taxation of the Funds, the IRS Code
requires each Fund to distribute net income and any capital gains realized on
its investments annually. A Fund's income from dividends and interest and any
net realized short-term gains are paid to shareholders as ordinary income
dividends. Net realized long-term gains are paid to shareholders as capital
gains distributions.
Dividends you receive from the Government Bond, Tax Free, Primary and Money
Market Funds, whether reinvested or taken as cash, are generally considered
taxable. Some dividends paid in January may be taxable as if they had been
paid the previous December. The Form 1099 that is mailed to you every January
details your dividends and their federal tax category, although you should
verify your tax liability with your tax professional.
The Tax Free Fund intends to distribute tax-exempt dividends that shareholders
may exclude from their gross income for federal income tax purposes. However,
the Tax Free Fund may invest a portion of its assets in securities that
generate income that is not exempt from federal or state income tax. Income
exempt from federal tax may be subject to state and local income tax. Any
capital gains distributed by the Tax Free Fund may be taxable. Also, you
should keep in mind that certain income from the Tax Free Fund may be subject
to the federal alternative minimum tax.
DISTRIBUTIONS EFFECT ON NAV. In order to be entitled to a dividend, an investor
must have acquired shares of a fund prior to the close of business on the
dustribution record date. A shareholder should be cautioned, however, before
purchasing shares of a fund immediately prior to a distribution. Dividends and
distributions paid by the Funds have the effect of reducing net asset value
per share on the record date by the amount of the payment. Therefore, a
dividend or distribution of record shortly after the purchase of shares by a
shareholder represents, in substance, a return of capital.
DIVIDEND REINVESTMENTS. Distributions not reinvested are paid by check or
transmitted to your bank account through an ACH transaction, if elected. If
the Postal Service cannot deliver your check, or if your check remains
uncashed for six months, the funds reserve the right to reinvest your
distribution check in your account at the net asset value on the business day
of the reinvestment and to reinvest all future distributions in shares of the
applicable fund(s). Dividends on capital gains declared in December to
shareholders of record in December and paid the following January will be
taxable to shareholders as if received in December. This is a convenient way
to accumulate additional shares and maintain or increase the shareholder's
earning base. Of course, any shares so acquired remain at market risk.
Shareholders have the right to change their election with respect to the
receipt of distributions by notifying SM&R in writing, but any such change
will be effective only as to distributions for which the
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DISTRIBUTIONS AND TAXES
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record date is seven or more business day after SM&R has received the
shareholder's written request.
BACKUP WITHHOLDING. Backup withholding for federal income tax may be applied,
where required by current IRS requirements, at the rate of 31% from taxable
dividends, distributions, and redemption proceeds (including exchanges) if you
fail to furnish the funds with a correct and properly certified Social
Security or Employer Identification Number when you sign your application, or
if you underreport your income to the Internal Revenue Service.
TAXABILITY OF REDEMPTIONS AND EXCHANGES. You should consult with a tax advisor
concerning the tax effect on the redemption or exchange of such shares. Any
time you sell or exchange shares, it is considered a taxable event for you.
Depending on the purchase price and the sale price of the shares you sell or
exchange, you may have a gain or a loss on the transaction. You are
responsible for any tax liabilities generated by your transactions.
RIGHTS RESERVED BY THE COMPANY. The Company, acting through its transfer agent,
reserves the right:
- to waive, lower, or raise investment minimums;
- to accept initial purchases by telephone from a registered representative;
- to refuse any purchase order;
- to cancel or rescind any purchase or exchange at any time prior to receipt
by the shareholder of written confirmation or, if later, within five (5)
business days of the transaction;
- to freeze an account and suspend account services when notice has been
received of a dispute involving the account owners or other parties or
there is reason to believe a fraudulent transaction may occur, or has
occurred;
- to restrict or refuse the use of faxed redemptions where there is a
question as to the validity of the request or proper documents have not
been received;
- to not act on instructions believed not to be genuine; or
- to eliminate duplicate mailings of fund material to shareholders who
reside at the same address.
- to otherwise modify the conditions of purchase and any services at any
time;
42
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APPENDIX
(DESCRIPTION OF RATINGS USED IN PROSPECTUS)
--------------------------------------------------------------------------
BOND RATINGS
DESCRIPTION OF STANDARD & POOR'S CORPORATION'S LONG-TERM BOND
(BONDS THAT EXTEND LONGER THAN ONE YEAR) RATING:
AAA An obligation rated "AAA" has the highest rating assigned by Standard &
Poor's. The obligor's capacity to meet its financial commitment on the
obligation is extremely strong.
AA An obligation rated "AA" differs from the highest-rated obligations only in
small degree. The obligor's capacity to meet its financial commitment on
the obligation is very strong.
A An obligation rated "A" is somewhat more susceptible to the adverse effects
of changes in circumstances and economic conditions than obligations in
higher-rated categories. However, the obligor's capacity to meet its
financial commitment on the obligation is still strong.
BBB An obligation rated "BBB" exhibits adequate protection parameters. However,
adverse economic conditions or changing circumstances are more likely to
lead to a weakened capacity of the obligor to meet its financial commitment
on the obligation.
Obligations rated "BB," "B," "CCC," "CC," and "C" are regarded as having
significant speculative characteristics. "BB" indicates the least degree of
speculation and "C" the highest. While such obligations will likely have
some quality and protective characteristics, these may be outweighed by
large uncertainties or major exposures to adverse conditions.
BB An obligation rated "BB" is less vulnerable to nonpayment than other
speculative issues. However, it faces major ongoing uncertainties or
exposure to adverse business, financial, or economic conditions, which
could lead to the obligor's inadequate capacity to meet its financial
commitment on the obligation.
B An obligation rated "B" is more vulnerable to nonpayment than obligations
rated "BB," but the obligor currently has the capacity to meet its
financial commitment on the obligation. Adverse business, financial, or
economic conditions will likely impair the obligor's capacity or
willingness to meet its financial commitment on the obligation.
DESCRIPTION OF MOODY'S INVESTOR'S SERVICE, INC.'S LONG-TERM BOND
(BONDS THAT EXTEND LONGER THAN ONE YEAR) RATINGS:
AAA Bonds which are rated "Aaa" are judged to be of the best quality. They
carry the smallest degree of investment risk and are generally referred to
as "gilt-edge." Interest payments are protected by a large or by an
exceptionally stable margin and principal is secure. While the various
protective elements are likely to change, such changes as can be visualized
are most unlikely to impair the fundamentally strong position of such
issues.
AA Bonds which are rated "Aa" are judged to be of high quality by all
standards. Together with the Aaa group, they comprise what are generally
known as high-grade bonds. They are rated lower than the best bonds because
margins of protection may not be as large as in Aaa securities, fluctuation
of protective elements may be of greater amplitude, or there may be other
elements present which make the long-term risks appear somewhat larger than
the Aaa securities.
A Bonds which are rated "A" possess many favorable investment attributes and
are to be considered as upper-medium-grade obligations. Factors giving
security to principal and interest are considered adequate, but elements
may be present which suggest a susceptibility to impairment sometime in the
future.
BAA Bonds which are rated "Baa" are considered as medium-grade obligations,
I.E., they are neither highly protected nor poorly secured. Interest
payments and principal security appear adequate for the present, but
certain protective elements may be lacking or may be characteristically
unreliable over any great length of time. Such bonds lack outstanding
investment characteristics and in fact have speculative characteristics as
well.
A-1
<PAGE>
APPENDIX
(DESCRIPTION OF RATINGS USED IN PROSPECTUS)
--------------------------------------------------------------------------
Ba Bonds which are rated "Ba" are judged to have speculative elements; their
future cannot be considered as well-assured. Often the protection of
interest and principal payments may be very moderate and thereby not well
safeguarded during both good and bad times over the future. Uncertainty of
position characterizes bonds in this class.
B Bonds which are rated "B" generally lack characteristics of the desirable
investment. Assurance of interest and principal payments or of maintenance
of other terms of the contract over any long period of time may be small.
DESCRIPTION OF FITCH IBCA BOND RATINGS:
AAA Highest credit quality. "AAA" ratings denote the lowest expectation of
credit risk. They are assigned only in case of exceptionally strong
capacity for timely payment of financial commitments. This capacity is
highly unlikely to be adversely affected by foreseeable events.
AA Very high credit quality. "AA" ratings denote a very low expectation of
credit risk. They indicate very strong capacity for timely payment of
financial commitments. This capacity is not significantly vulnerable to
foreseeable events.
A High credit quality. "A" ratings denote a low expectation of credit risk.
The capacity for timely payment of financial commitments is considered
strong. This capacity may, nevertheless, be more vulnerable to changes in
circumstances or in economic conditions than is the case for higher
ratings.
BBB Good credit quality. "BBB" ratings indicate that there is currently a low
expectation of credit risk. The capacity for timely payment of financial
commitments is considered adequate, but adverse changes in circumstances
and in economic conditions are more likely to impair this capacity. This is
the lowest investment-grade category.
MUNICIPAL NOTE RATINGS
DESCRIPTION OF MOODY'S INVESTOR SERVICE INC.'S SHORT-TERM MUNICIPAL NOTE
(NOTES THAT MATURE IN LESS THAN ONE YEAR) RATINGS:
MIG 1/VMIG 1 This designation denotes best quality. There is present strong
protection by established cash flows, superior liquidity support or
demonstrated broad-based access to the market for refinancing.
MIG 2/VMIG 2 This designation denotes high quality. Margins of protection are
ample although not so large as in the preceding group.
MIG 3/VMIG 3 This designation denotes favorable quality. All security elements
are accounted for but there is lacking the undeniable strength of
the preceding grades. Liquidity and cash flow protection may be
narrow and market access for refinancing is likely to be less well
established.
MIG 4/VMIG 4 This designation denotes adequate quality. Protection commonly
regarded as required of an investment security is present and
although not distinctly or predominantly speculative, there is
specific risk.
DESCRIPTION OF STANDARD AND POOR'S SHORT-TERM MUNICIPAL NOTE RATINGS:
SP-1 Strong capacity to pay principal and interest. An issue determined to
possess a very strong capacity to pay debt service is given a plus (+)
designation.
SP-2 Satisfactory capacity to pay principal and interest, with some
vulnerability to adverse financial and economic changes over the term of
the notes.
SP-3 Speculative capacity to pay principal and interest.
A-2
<PAGE>
APPENDIX
(DESCRIPTION OF RATINGS USED IN PROSPECTUS)
--------------------------------------------------------------------------
COMMERCIAL PAPER RATINGS
DESCRIPTION OF STANDARD & POOR'S CORPORATION'S THREE HIGHEST COMMERCIAL PAPER
RATINGS:
A-1 This designation indicates that the degree of safety regarding timely
payment is strong. Those issues determined to possess extremely strong
safety characteristics are denoted with a plus sign (+) designation.
A-2 Capacity for timely payment on issues with this designation is
satisfactory. However, the relative degree of safety is not as high as for
issues designated "A-1".
A-3 Issues carrying this designation have an adequate capacity for timely
payment. They are, however, more vulnerable to the adverse effects of
changes in circumstances than obligations carrying the higher designations.
DESCRIPTION OF MOODY'S INVESTORS SERVICE, INC.'S THREE HIGHEST COMMERCIAL PAPER
RATINGS:
PRIME-1 Issuers rated Prime-1 (or supporting institutions) have a superior
ability for repayment of senior short-term debt obligations. Prime-1
repayment ability will often be evidenced by many of the following
characteristics:
- Leading market positions in well-established industries.
- High rates of return on funds employed.
- Conservative capitalization structure with moderate reliance on debt
and ample asset protection.
- Broad margins in earnings coverage of fixed financial charges and high
internal cash generation.
- Well-established access to a range of financial markets and assured
sources of alternate liquidity.
PRIME-2 Issuers rated Prime-2 (or supporting institutions) have a strong ability
for repayment of senior short-term debt obligations. This will normally
be evidenced by many of the characteristics cited above but to a lesser
degree. Earnings trends and coverage ratios, while sound, may be more
subject to variation. Capitalization characteristics, while still
appropriate, may be more affected by external conditions. Ample
alternate liquidity is maintained.
PRIME-3 Issuers rated Prime-3 (or supporting institutions) have an acceptable
ability for repayment of senior short-term obligations. The effect of
industry characteristics and market compositions may be more pronounced.
Variability in earnings and profitability may result in changes in the
level of debt protection measurements and may require relatively high
financial leverage. Adequate alternate liquidity is maintained.
DESCRIPTION OF FITCH IBCA SHORT-TERM DEBT RATINGS (INCLUDING COMMERCIAL PAPER):
F1 Highest credit quality. Indicates the strongest capacity for timely payment
of financial commitments; may have an added "+" to denote any exceptionally
strong credit feature.
F2 Good credit quality. A satisfactory capacity for timely payment of
financial commitments, but the margin of safety is not as great as in the
case of the higher ratings.
F3 Fair credit quality. The capacity for timely payment of financial
commitments is adequate; however, near-term adverse changes could result in
a reduction to non-investment grade.
B Speculative. Minimal capacity for timely payment of financial commitments,
plus vulnerability to near-term adverse changes in financial and economic
conditions.
DESCRIPTION OF DUFF & PHELP'S HIGHEST COMMERCIAL RATINGS:
HIGH GRADE
D-1+ Highest certainty of timely payment. Short-term liquidity, including
internal operating factors and/or access to alternative sources of funds,
is outstanding, and safety is just below risk-free U.S. Treasury short-term
obligations.
D-1 Very high certainty of timely payment. Liquidity factors are excellent and
supported by good fundamental protection factors. Risk factors are minor.
A-3
<PAGE>
APPENDIX
(DESCRIPTION OF RATINGS USED IN PROSPECTUS)
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D-1- High certainty of timely payment. Liquidity factors are strong and
supported by good fundamental protection factors. Risk factors are very
small.
GOOD GRADE
D-2 Good certainty of timely payment. Liquidity factors and company
fundamentals are sound. Although ongoing funding needs may enlarge total
financing requirements, access to capital markets is good. Risk factors are
small.
DESCRIPTION OF THOMSON BANKWATCH, INC.'S TWO HIGHEST COMMERCIAL RATINGS:
TBW-1 The highest category; indicates a very high likelihood that principal and
interest will be paid on a timely basis.
TBW-2 The second-highest category; while the degree of safety regarding timely
repayment of principal and interest is strong, the relative degree of
safety is not as high as for issues rated TBW-1.
FEDERAL FUNDS
As used in this Prospectus and in the Fund's Statement of Additional
Information, "Federal Funds" means a commercial bank's deposits in a Federal
Reserve Bank which can be transferred from one member bank's account to that of
another member bank on the same day. Federal Funds are considered to be
immediately available funds.
A-4
<PAGE>
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Notes
<PAGE>
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Notes
<PAGE>
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Notes
<PAGE>
FOR MORE INFORMATION ABOUT THE FUNDS
--------------------------------------------------------------------------
The following documents contain more information about the funds and are
available free upon request:
STATEMENT OF ADDITIONAL INFORMATION (SAI)
The SAI contains additional information about all aspects of the funds. A
current SAI has been filed with the Securities and Exchange Commission and is
incorporated herein by reference.
ANNUAL AND SEMI-ANNUAL REPORTS
The funds' annual and semi-annual reports provide additional information about
the funds' investments. The annual report contains a discussion of the market
conditions and investment strategies that significantly affected each fund's
performance during the last fiscal year.
REQUESTING DOCUMENTS
You may request a free copy of the SAI and these reports, make shareholder
inquiries, or request further information about the funds either by contacting
your broker or by contacting the funds at:
SECURITIES MANAGEMENT AND RESEARCH, INC.
P.O BOX 58969
HOUSTON, TEXAS 77258-8969
TELEPHONE:1-800-231-4639 (TOLL FREE) OR
1-281-334-2469 (COLLECT)
PUBLIC INFORMATION
You can review and copy information about the funds, including the SAI, at the
Securities and Exchange Commission's Public Reference Room in Washington D.C.
You may obtain information on the operation of the public reference room by
calling the Commission at 1-800-SEC-0330. Reports and other information about
the Funds also are available on the Commission's Internet site at
http://www.sec.gov. You may obtain copies of this information, upon payment of a
duplicating fee, by writing the Public Reference Section of the Securities and
Exchange Commission, Washington, D.C. 20549-6009.
SM&R GOVERNMENT BOND FUND
SM&R TAX FREE FUND
SM&R PRIMARY FUND
SM&R MONEY MARKET FUND
Investment Company
File No. 811- 6477
<PAGE>
SM&R INVESTMENTS, INC.
THE CLASS Y AND J PROSPECTUSES ARE BEING INCORPORATED BY REFERENCE.
<PAGE>
[LOGO]
SM&R INVESTMENTS, INC.
FIXED INCOME FUNDS
INVESTMENT STRATEGIES FOR A CHANGING WORLD
CLASS T
SM&R GOVERNMENT BOND FUND
SM&R TAX FREE FUND
SINGLE CLASS FUNDS
SM&R PRIMARY FUND
SM&R MONEY MARKET FUND
Prospectus, December 31, 1999
The Securities and Exchange Commission has not approved or disapproved these
securities or passed upon the adequacy of this prospectus. Any representation to
the contrary is a criminal offense.
<PAGE>
TABLE OF CONTENTS
-------------------------------------------------------------------
<TABLE>
<S> <C>
RISK RETURN/SUMMARY..................... 1
SM&R Government Bond Fund............... 1
SM&R Tax Free Fund...................... 2
SM&R Primary Fund....................... 3
SM&R Money Market Fund.................. 4
PERFORMANCE............................. 6
Bar Charts and Performance Tables....... 7
EXPENSES OF THE FUNDS................... 9
Fees and Expenses of the Funds.......... 9
SHARES OF THE FUND...................... 11
Eligible Purchasers of Class T Shares... 11
Class T Sales Charges................... 12
Sales Charge Reductions and Waivers..... 12
INVESTMENT OBJECTIVES AND POLICIES...... 14
Government Bond Fund.................... 14
Tax Free Fund........................... 16
Primary Fund............................ 19
Money Market Fund....................... 19
OTHER RISK FACTORS...................... 22
THE FUNDS AND THEIR MANAGEMENT ......... 24
Investment Advisor...................... 24
Portfolio Management.................... 25
FINANCIAL HIGHLIGHTS.................... 26
Government Bond Fund.................... 27
Tax Free Fund........................... 28
Primary Fund............................ 29
Money Market Fund....................... 30
SHAREHOLDER'S GUIDE TO INVESTING WITH
SM&R'S MUTUAL FUNDS..................... 31
APPENDIX................................ A-1
</TABLE>
WHY READING THIS PROSPECTUS IS IMPORTANT TO YOU
This prospectus explains the investment objectives, risks and strategies of
each of the SM&R Mutual Funds. Reading the prospectus will help you to decide
which SM&R Mutual Fund, if any, is the right investment for you. We suggest
that you keep this prospectus for future reference.
<PAGE>
FUND PROFILE SM&R GOVERNMENT BOND FUND
------------------------------------------------------------------------
FUND FACTS
YOU MAY FIND
HELPFUL
Classes of Shares
Offered in this
Prospectus:
Class T-Fund #026
Investment Adviser:
Securities
Management and
Research, Inc.
Portfolio Manager:
Terry E. Frank
Portfolio Turnover:
Class T
NASDAQ Symbols:
Class T
Dividend Payment
Schedule:
Monthly
Refer to the
"Overview of
Common Risk
Factors" on page 5
for a more detailed
explanation of the
principal risk factors.
INVESTMENT OBJECTIVE
To provide as high a level of current income, liquidity, and safety of principal
as is consistent with prudent investment risks through investment in a portfolio
consisting primarily of securities issued or guaranteed by the U.S. Government,
its agencies, or instrumentalities.
PRINCIPAL INVESTMENT STRATEGIES
The Government Bond Fund normally invests at least 65% of its assets in
securities issued or guaranteed by the U.S. Government, its agencies, or
instrumentalities. These may include Treasuries and mortgage-backed securities,
such as Ginnie Maes, Freddie Macs, and Fannie Maes. This fund may also invest
assets in collateralized mortgage obligations.
The Government Bond Fund may invest in zero coupon bonds, which are U.S.
Government obligations. The fund may also invest in commercial paper,
certificates of deposit, corporate debt securities rated "A" or higher, and
repurchase agreements.
The Government Bond Fund generally invests primarily in medium and long term
securities. The average portfolio maturity generally is expected to be in the
six to fifteen year range (some securities may have longer or shorter
durations). The average portfolio maturity may be shorter when management
anticipates that interest rates will increase, and longer when management
anticipates that interest rates will decrease.
PRINCIPAL RISK FACTORS
You could lose money on your investment in the Government Bond Fund, or it could
underperform other investments. The Government Bond Fund is subject to the
following principal risks.
- Interest Rate Risk
- Investment Style or Management Risk
- Market Risk
- Prepayment and Extension Risk
WHO MAY WANT TO INVEST IN THE FUND
The Government Bond Fund may be appropriate if you:
- are seeking a regular stream of income to meet current needs
- are seeking higher potential returns than money market funds and are willing
to accept moderate risk of volatility
- are retired or nearing retirement
The Government Bond Fund may NOT be appropriate if you:
- are investing for maximum return over a long time horizon
- require absolute stability of your principal
1
<PAGE>
FUND PROFILE SM&R TAX FREE FUND
------------------------------------------------------------------------
FUND FACTS
YOU MAY FIND
HELPFUL
Classes of Shares
Offered in this
Prospectus:
Class T-Fund #028
Investment Adviser:
Securities
Management and
Research, Inc.
Portfolio Manager:
Terry E. Frank
Portfolio Turnover:
Class T
NASDAQ Symbols:
Class T
Dividend Payment
Schedule:
Monthly
Refer to the
"Overview of
Common Risk
Factors" on page 5
for a more detailed
explanation of the
principal risk factors.
INVESTMENT OBJECTIVE
To provide as high a level of interest income largely exempt from federal income
taxes as is consistent with preservation of capital through investment of at
least 80% of its net assets in tax-exempt securities during normal market
conditions.
PRINCIPAL INVESTMENT STRATEGIES
The Tax Free Fund invests primarily in tax-exempt securities. During normal
market conditions, this fund invests at least 80% of its assets in municipal
securities that pay interest exempt from federal income taxes. The Tax Free Fund
generally invests in securities rated Baa or better by Moody's or BBB or better
by Standard and Poor's and Fitch. This fund may not invest more than 20% of its
assets in UNRATED municipal securities. These securities may be less liquid than
comparably rated municipal securities and involve somewhat greater risk. This
fund may also invest up to 20% of its assets in Government guaranteed taxable
bonds, highly rated corporate bonds, or commercial paper.
The average portfolio maturity of the Tax Free Fund generally is expected to be
in the six to twelve year range (some securities have longer or shorter
durations). The average portfolio maturity may be shorter when management
anticipates that interest rates will increase, and longer when management
anticipates that interest rates will decrease.
PRINCIPAL RISK FACTORS
You could lose money on your investment in the Tax Free Fund, or it could
underperform other investments. The Tax Free Fund is subject to the following
principal risks.
- Interest Rate Risk
- Credit Risk
- Liquidity Risk
- Investment Style or Management Risk
- Market Risk
ALSO, SOME OF YOUR DIVIDEND INCOME MAY BE TAXABLE.
WHO MAY WANT TO INVEST IN THE FUND
The Tax Free Fund may be appropriate if you:
- are willing to sacrifice some investment return for income exempt from
federal income tax and, under certain conditions, exempt from state and
local taxes
- are in a high tax bracket (28% and up)
- are seeking a regular stream of income to meet current needs
- are seeking higher potential returns than money market funds and are willing
to accept moderate risk of volatility
The Tax Free Fund may NOT be appropriate if you:
- are investing for maximum return
- require absolute stability of your principal
- prefer capital gains over ordinary income
2
<PAGE>
FUND PROFILE SM&R PRIMARY FUND
------------------------------------------------------------------------
FUND FACTS
YOU MAY FIND
HELPFUL
Single Class:
Fund #627
Investment Adviser:
Securities
Management and
Research, Inc.
Portfolio Managers:
Terry E. Frank
John S. Maidlow
NASDAQ Symbol:
Dividend Payment
Schedule:
Monthly
Refer to the
"Overview of
Common Risk
Factors" on page 5
for a more detailed
explanation of the
principal risk factors.
INVESTMENT OBJECTIVE
To seek maximum current income consistent with capital preservation and
liquidity through investment primarily in commercial paper.
PRINCIPAL INVESTMENT STRATEGIES
The Primary Fund invests primarily in commercial paper. Commercial paper is
short-term unsecured promissory notes issued by corporations. This fund will
only invest in commercial paper rated in one of the two highest rating
categories.
The Primary Fund may also invest in:
- U.S. Government obligations;
- corporate debt obligations maturing in five years or less and rated "A" or
higher;
- certificates of deposit, generally maturing in 3 years or less; and
- repurchase agreements.
PRINCIPAL RISK FACTORS
You could lose money on your investment in the Primary Fund, or it could
underperform other investments. The Primary Fund is subject to the following
risks.
- Interest Rate Risk
- Credit Risk
- Investment Style or Management Risk
- Market Risk
By limiting its investments as described above, the Primary Fund may not achieve
as high a level of current income as a fund investing in lower-rated securities
or longer-term securities.
WHO MAY WANT TO INVEST IN THE FUND
The Primary Fund may be appropriate if you:
- are seeking a regular stream of income to meet current needs
- are seeking higher potential returns than money market funds and are willing
to accept moderate risk of volatility
- are more concerned with safety of principal than with investment returns
- are retired or nearing retirement
The Primary Fund may NOT be appropriate if you:
- are investing for maximum return
- require absolute stability of your principal
- are investing for goals that are many years in the future
- prefer capital gains over ordinary income
3
<PAGE>
FUND PROFILE SM&R MONEY MARKET FUND
------------------------------------------------------------------------
FUND FACTS
YOU MAY FIND
HELPFUL
Single Class:
Fund #620
Investment Adviser:
Securities
Management and
Research, Inc.
Portfolio Managers:
Terry E. Frank
John S. Maidlow
NASDAQ Symbol:
Dividend Payment
Schedule:
Monthly
Refer to the
"Overview of
Common Risk
Factors" on page 5
for a more detailed
explanation of the
principal risk factors.
INVESTMENT OBJECTIVE
To seek the highest current income consistent with the stability of principal
and maintenance of liquidity.
PRINCIPAL INVESTMENT STRATEGIES
The Money Market Fund seeks to achieve its objective by investing in
high-quality short-term money market instruments, including: U.S. Government
obligations, certificates of deposit, banker's acceptances, commercial paper,
collateralized mortgage obligations, and corporate bonds and notes. This fund
limits its investments to those short-term securities that it determines present
minimal credit risk and meet certain rating requirements (in the two highest
short-term rating categories).
PRINCIPAL RISK FACTORS
The Fund is subject to the following risks:
- Interest Rate Risk
- Credit Risk
- Liquidity Risk
- Investment Style or Management Risk
However, the risks of investment in the Money Market Fund may be expected to be
less than for other mutual funds. By limiting its investments as described
above, this fund may not achieve as high a level of current income as a fund
investing in lower-rated securities. ALTHOUGH THE MONEY MARKET FUND SEEKS TO
PRESERVE THE VALUE OF YOUR INVESTMENT AT $1.00 PER SHARE, IT IS POSSIBLE TO LOSE
MONEY BY INVESTING IN THE MONEY MARKET FUND. YOU SHOULD KEEP IN MIND THAT AN
INVESTMENT IN THE MONEY MARKET FUND IS NOT INSURED OR GUARANTEED BY THE FEDERAL
DEPOSIT INSURANCE CORPORATION OR ANY OTHER GOVERNMENT AGENCY.
WHO MAY WANT TO INVEST IN THE FUND
The Money Market Fund may be appropriate if you:
- require stability of principal
- are seeking a mutual fund for the cash portion of an asset allocation
program
- need to "park" your money temporarily
- are more concerned with safety of principal than with investment returns
- are investing emergency reserves
The Money Market Fund may NOT be appropriate if you:
- want federal deposit insurance
- are seeking an investment that is likely to outpace inflation
- are investing for retirement or other goals that are many years in the
future
- are investing for growth or maximum current income
4
<PAGE>
OVERVIEW OF COMMON RISK FACTORS
-------------------------------------------------------------------
COMMON RISK FACTORS FOR
ALL OF SM&R'S MUTUAL FUNDS
Please remember that mutual fund shares are:
- - Not guaranteed to achieve their investment goal
- - Not insured, endorsed or guaranteed by the FDIC, a bank or any government
agency
- - Subject to investment risks, including possible loss of your original
investment
Like most investments, your investment in an SM&R Mutual Fund could fluctuate in
value over time and could result in a loss of money.
- ---------------------------------------------------------
RISK FACTORS SPECIFIC TO THE
SM&R'S MUTUAL FUNDS
IMPORTANT
The following factors may affect the value of your investment IN ONE OR MORE
OF THE SM&R MUTUAL FUNDS.
CREDIT RISK
The risk that the issuer of a security, or a party to a contract, will
default or otherwise not honor a financial obligation. THIS RISK PRIMARILY
AFFECTS THE TAX FREE, PRIMARY AND MONEY MARKET FUNDS.
INTEREST RATE RISK
The risk of declines in market value of an income-bearing investment due to
changes in prevailing interest rates. With fixed-rate securities, a rise in
interest rates typically causes a decline in market values, while a fall in
interest rates typically causes an increase in market values. THIS RISK
AFFECTS ALL FOUR FUNDS, BUT HAS LESS EFFECT ON THE MONEY MARKET AND PRIMARY
FUNDS.
LIQUIDITY RISK
The risk that certain securities or other investments may be difficult or
impossible to sell at the time the fund would like to sell them or at the
price the fund values them. The fund may have to sell at a lower price, sell
other securities instead, or forego an investment opportunity, any of which
could have a negative effect on fund management or performance. THIS RISK
PRIMARILY AFFECTS THE TAX FREE, PRIMARY AND MONEY MARKET FUNDS.
INVESTMENT STYLE OR MANAGEMENT RISK
The risk that a strategy used by a fund's management may fail to produce the
intended result. THIS RISK AFFECTS ALL FOUR FUNDS.
MARKET RISK
The risk that the market value of a security may move up and down, sometimes
rapidly and unpredictably. The fluctuations may cause a security to be worth
less than the price originally paid for it, or less than it was worth at an
earlier time. Market risk may affect a single issuer, industry, sector of the
economy, or the market as a whole. This risk is common to all stocks and
bonds and the mutual funds that invest in them. THIS RISK AFFECTS ALL FOUR
FUNDS.
PREPAYMENT AND EXTENSION RISK
PREPAYMENT RISK is the risk that an unexpected fall in prevailing interest
rates will shorten the life of an outstanding mortgage-backed security by
increasing the actual or expected number of mortgage prepayments, thereby
reducing the security's value. EXTENSION RISK is the risk that an unexpected
rise in prevailing interest rates will extend the life of an outstanding
mortgage-backed security by reducing the actual or expected number of
mortgage prepayments, thereby reducing the security's value. THIS RISK
APPLIES ONLY TO THE GOVERNMENT BOND FUND.
OTHER RISKS
Each investor will be subject to all the risks normally attendant to business
operations, changes in general economic conditions, governmental rules and
fiscal policies, acts of God, and other factors beyond the control of the
funds management.
YEAR 2000 RISKS
Many services provided to the funds and their shareholders depend on the
smooth functioning of computer systems. Many computer software systems in use
today cannot distinguish the year 2000 from the year 1900 because of the way
the dates are encoded and calculated, referred to as the Year 2000 Problem.
The Year 2000 Problem could have a negative impact on handling securities
trades, payment of interest and dividends, pricing, and account services.
Like other mutual funds, financial and business organizations, and
individuals around the world, the funds could be adversely affected if the
computer systems used by SM&R (which acts as their investment adviser,
underwriter, custodian, and transfer agent) do not properly process and
calculate date-related information and data from and after January 1, 2000.
SM&R is taking steps to address the Year 2000 Problem with respect to the
computer systems that it uses and to obtain assurances that comparable steps
are being taken by any other service providers. At this time, however, there
can be no assurance that these steps will be sufficient to avoid any adverse
impact on the funds and their shareholders.
5
<PAGE>
PERFORMANCE
-------------------------------------------------------------------
PERFORMANCE
The bar charts and average annual total return tables shown below provide some
indication of the risks of investing in the funds and the variability of returns
by:
- - showing performance for each year since inception and
- - showing how each fund's average annual returns for certain periods compare to
those of a broad-based securities market index.
PAST PERFORMANCE IS NOT NECESSARILY
AN INDICATION OF HOW THE FUNDS
WILL PERFORM IN THE FUTURE.
GOVERNMENT BOND FUND
YEAR-BY-YEAR TOTAL RETURN (%)
EDGAR REPRESENTATION OF DATA POINTS USED IN PRINTED GRAPHIC
<TABLE>
<S> <C>
1993 9.31%
1994 -4.65%
1995 18.57%
1996 3.43%
1997 8.14%
1998
</TABLE>
For the nine month period ended September 30, 1999, the Government Bond Fund,
Class T shares had a total return of %.
<TABLE>
<CAPTION>
QUARTER ENDED TOTAL RETURN
<S> <C> <C>
Best Quarter:
Worst Quarter:
</TABLE>
The next table lists the Government Bond Fund's year-by-year average annual
total return over the past one and five year periods and since inception,
including sales charges. This table is intended to provide you with some
indication of the risks of investing in the Fund. At the bottom of the table you
can compare this performance with the Lehman Brothers Government/Mortgage-Backed
Securities Index. This index includes all public obligations of the U.S.
treasury and all publicly issued debt of U.S. Government agencies, quasi-federal
corporations and corporate debt guaranteed by the U.S. Government as well as 15
and 30 year fixed rate securities backed by mortgage pools of the GNMA, FHLMA,
and FNMA.
AVERAGE ANNUAL TOTAL RETURNS
(for the periods ending 12/31/98)
<TABLE>
<CAPTION>
PAST PAST 5 PAST SINCE
ONE YEAR YEARS 10 YEARS INCEPTION
<S> <C> <C> <C> <C>
SM&R Government Bond Fund % %
Lehman Brothers
Government/Mortgage-Backed
Securities Index % %
</TABLE>
6
<PAGE>
PERFORMANCE
-------------------------------------------------------------------
TAX FREE FUND
YEAR-BY-YEAR TOTAL RETURN (%)
EDGAR REPRESENTATION OF DATA POINTS USED IN PRINTED GRAPHIC
<TABLE>
<S> <C>
1994 -5.49%
1995 17.87%
1996 4.48%
1997 8.98%
1998
</TABLE>
For the nine month period ended September 30, 1999, the Tax Free Fund, Class T
shares had a total return of %.
<TABLE>
<CAPTION>
QUARTER ENDED TOTAL RETURN
<S> <C> <C>
Best Quarter:
Worst Quarter:
</TABLE>
The next table lists the Tax Free Fund's year-by-year average annual total
return over the past one and five year periods and since inception, including
sales charges. This table is intended to provide you with some indication of the
risks of investing in the Fund. At the bottom of the table you can compare this
performance with the Lehman Brothers Municipal Index. This is an index of
investment grade tax exempt bonds classified into four major sections: General
Obligations, Revenue, Insured and Preferred.
AVERAGE ANNUAL TOTAL RETURNS
(for the periods ending 12/31/98)
<TABLE>
<CAPTION>
PAST PAST 5 PAST SINCE
ONE YEAR YEARS 10 YEARS INCEPTION
<S> <C> <C> <C> <C>
SM&R Tax Free Fund 4.08% 4.94%
Lehman Brothers Municipal
Index 9.19% 11.18%
</TABLE>
PRIMARY FUND
YEAR-BY-YEAR TOTAL RETURN (%)
EDGAR REPRESENTATION OF DATA POINTS USED IN PRINTED GRAPHIC
<TABLE>
<S> <C>
1993 2.48%
1994 3.58%
1995 5.26%
1996 4.92%
1997 5.08%
1998
</TABLE>
For the nine month period ended September 30, 1999, the Primary Fund had a total
return of %.
<TABLE>
<CAPTION>
QUARTER ENDED TOTAL RETURN
<S> <C> <C>
Best Quarter:
Worst Quarter:
</TABLE>
The next table lists the Primary Fund's average year-by-year return over the
past one and five year periods and since inception, including sales charges.
This table is intended to provide you with some indication of the risks of
investing in the Fund. At the bottom of the table you can compare this
performance with the Lehman Government/ Corporate Index.
This index represents all public obligations of the U.S. Treasury as well as all
publicly issued debt of U.S. Government agencies with maturities of one to three
years.
AVERAGE ANNUAL TOTAL RETURNS
(for the periods ending 12/31/98)
<TABLE>
<CAPTION>
PAST PAST 5 PAST SINCE
ONE YEAR YEARS 10 YEARS INCEPTION
<S> <C> <C> <C> <C>
SM&R Primary Fund 5.08% 4.26%
Lehman Government/ Corporate
Index 7.99% 7.02%
</TABLE>
7
<PAGE>
PERFORMANCE
-------------------------------------------------------------------
MONEY MARKET FUND
A bar chart for the Money Market Fund is not included at this time, as the Fund
did not begin operation until 1/1/99 and has not been in existence for a full
calendar year.
The following table lists the Money Market Fund's average return since inception
(1/1/99) and the Fund's 7-day current yield. At the bottom of the table you can
compare this performance with the ????? Index. This index represents ????
AVERAGE ANNUAL TOTAL RETURN
(for the period ended 8/31/99)
<TABLE>
<CAPTION>
INCEPTION PAST PAST 10 SINCE 7-DAY
DATE 1 YEAR 5 YEARS YEARS INCEPTION YIELD
<S> <C> <C> <C> <C> <C> <C>
Money Market Fund 1/1/99 N/A N/A N/A
???? Index
</TABLE>
8
<PAGE>
EXPENSES OF THE FUNDS
-------------------------------------------------------------------
FEES AND EXPENSES OF THE FUNDS
This table describes the fees and expenses that you may pay if you buy and hold
shares of the funds.
SHAREHOLDER FEES
(fees paid directly from your investment)
<TABLE>
<CAPTION>
GOVERNMENT TAX FREE MONEY
BOND FUND FUND PRIMARY MARKET
CLASS T CLASS T FUND FUND
<S> <C> <C> <C> <C>
Maximum Sales Charge Imposed
on Purchases
(as a percentage of offering
price) 4.5%(1) 4.5%(1) None None
Maximum Deferred Sales Charge
(as a percentage of offering
price)(2) None None None None
Maximum Sales Charge Imposed
on Reinvested Dividends
(as a percentage of offering
price) None None None None
EXCHANGE FEES None None None None
</TABLE>
(1) You pay a sales charge of 4.5% on initial investments in Class T shares of
less than $100,000. You pay a reduced sales charge at certain breakpoints,
as follows:
- 3.50% on initial investments of at least $100,000 but less than $250,000
- 2.50% on initial investments of at least $250,000 but less than $500,000
- zero on initial investments of $500,000 or more
(2) You pay an $10.00 transaction fee for each expedited wire redemption.
ANNUAL FUND OPERATING EXPENSES(3)
(expenses that are deducted from fund assets)
<TABLE>
<CAPTION>
GOVERNMENT TAX FREE MONEY
BOND FUND FUND PRIMARY MARKET
CLASS T CLASS T FUND FUND
<S> <C> <C> <C> <C>
Management Fees 0.50% 0.50% 0.50% 0.25%
Other Expenses(4) 0.50% 0.75% 0.48% 0.25%
Total Annual Fund Operating
Expenses 1.00% 1.25% 0.98% 0.50%
Fee Waivers and Expense
Reimbursements(5) -- -- -- --
--- --- ------- -------
Net Expenses 1.00% 1.25% 0.98% 0.50%
</TABLE>
(3) The "Management Fees" and "Other Expenses" for the Government Bond,
Primary, and Tax Free Funds are for the year ended August 31, 1999 and for
the Money Market Fund for the period January 1 - August 31, 1999. NO
DISTRIBUTION OR SERVICE (12b-1) FEES ARE IMPOSED ON CLASS T SHARES OF THE
GOVERNMENT BOND FUND AND THE TAX FREE FUND, OR ON ANY SHARES OF THE PRIMARY
FUND AND MONEY MARKET FUND.
(4) "Other Expenses" include the 0.25% Administrative Service Fee. "Other
Expenses" for Class T shares are based on expenses and average net assets
of the Government Bond and Tax Free Funds for the fiscal year ended August
31, 1999. "Other Expenses" for the Primary Fund are for the fiscal year
ended August 31, 1999, and for the period January 1 - August 31, 1999 for
the Money Market Fund.
(5) The Fee Table reflects fees waived and expenses assumed CONTRACTUALLY by
the funds' manager, Securities Management and Research, Inc. ("SM&R").
Pursuant to the Administrative Service Agreement, SM&R will pay (or
reimburse) each fund for regular operating expenses in excess of 1.25%
(0.50% for the Money Market Fund) per year of such fund's average daily net
assets. Regular operating expenses include the advisory fee and
administrative fee, but do not include any 12b-1 fee or class-specific
expenses.
The Fee Table does not reflect fees waived or expenses assumed by SM&R on a
VOLUNTARY basis. During the fiscal year ended August 31, 1999, SM&R
voluntarily waived fees of %, and % for the, Primary Fund and Tax
Free Fund, respectively. SM&R intends to continue to voluntarily waive the
advisory fee for the Tax Free Fund. SM&R also intends to reimburse regular
operating expenses that exceed average daily net assets as follows: 0.80%
for the Primary Fund and 1.00% for the Government Bond Fund. SM&R may
discontinue or reduce any such waiver or reimbursement of expenses at any
time without notice.
9
<PAGE>
EXPENSES OF THE FUNDS
-------------------------------------------------------------------
The following table shows fees and expenses for the Government Bond, Primary,
and Tax Free Funds for the year ended August 31, 1999 taking into account fee
all waivers and expense reimbursements, both contractual and voluntary. For the
Money Market Fund, they are estimates considering estimated fee waivers and
expense reimbursements for the period September 1 - August 31, 1999.
ANNUAL FUND OPERATING EXPENSES
(As a Percentage of Average Net Assets AFTER All Fee Waivers and Expense
Reimbursements)
<TABLE>
<CAPTION>
GOVERNMENT TAX FREE MONEY
BOND FUND FUND PRIMARY MARKET
CLASS T CLASS T FUND FUND
<S> <C> <C> <C> <C>
Management Fees 0.50% 0.00% 0.32% 0.25%
Other Expenses 0.50% 0.75% 0.48% 0.25%
Total Annual Fund Operating
Expenses 1.00% 0.75% 0.80% 0.50%
</TABLE>
EXPENSES
The tables below show the total expenses you would pay on a $10,000 investment
over one, three-, five-, and ten-year periods. These examples are intended to
help you compare the cost of investing in the funds with the cost of investing
in other mutual funds and are for illustration only. These examples assume a 5%
average annual return each year and that you reinvest all of your dividends.
YOUR ACTUAL COSTS MAY BE HIGHER OR LOWER THAN SHOWN.
You would pay the following expenses, based on these assumptions, if you
actually redeem all of your shares at the end of the period shown:
<TABLE>
<CAPTION>
ONE THREE FIVE TEN
YEAR YEARS YEARS YEARS
<S> <C> <C> <C> <C>
Government Bond Fund (Class T) $ 547 $754 $ 978 $ 1,620
Tax Free Fund (Class T) $ 572 $829 $ 1,105 $ 1,893
Primary Fund $ 100 $312 $ 542 $ 1,201
Money Market Fund $ 51 $160 $ 280 $ 628
</TABLE>
Because there are no deferred sales charges or redemption fees, you would pay
the same expenses, based on these assumptions, if you did NOT redeem your
shares.
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SM&R Investments, Inc. (the "Company" or "we") offers four separate investment
portfolios. The Money Market and Primary Funds each consist of a single class of
shares offered at net asset value and do not impose any sales charges or
distribution and service (12b-1) fees. The Government Bond and Tax Free Funds
offer Class T shares at net asset value plus an initial sales charge. Class T
shares do not impose any distribution and service (12b-1) fees.
The Government Bond and Tax Free Funds offer five other classes through separate
prospectuses: (1) Class A "front-end load" shares; (2) Class B "back-end load"
shares; (3) Class C "level load" shares; (4) Class Y "institutional" shares; and
(5) Class J shares offered through certain financial intermediaries that have
distribution agreements with SM&R. Class A, Class B, Class C, Class Y, and Class
J shares are subject to different sales charges and other expenses and,
accordingly, may have expense ratios and performance that differs from those of
Class T shares. You are encouraged to consider all of the Company's class
alternatives and choose the one that fits your individual circumstances at the
lowest level of fees. FOR MORE INFORMATION ON THE OTHER CLASSES OF SHARES OR TO
REQUEST A PROSPECTUS FOR ANOTHER CLASS, INVESTORS MAY CONTACT INVESTOR SERVICES
AT (800) 231-4639.
ELIGIBLE PURCHASERS OF CLASS T SHARES
In general, Class T shares may only be purchased by existing shareholders that
owned shares of the Government Bond Fund or Tax Free Fund on December 31, 1998
and certain other designated persons. The other designated persons that can
purchase Class T shares include:
(a) present and retired directors, officers, and full-time employees of the
Company;
(b) present and retired directors, officers, registered representatives, and
full-time employees of SM&R and their spouses;
(c) present and retired officers, directors, and full-time employees (and
their spouses) of: (1) American National Insurance Company ("American
National"), (2) American National subsidiaries, and (3) any corporation or
partnership for which any of American National's present directors serve
as a director or partner;
(d) present and retired partners and full-time employees of legal counsel to
SM&R (and officers and directors of any professional corporations which
are partners of such legal counsel) and their spouses;
(e) any child or step-child of any person named in (a), (b), (c), or (d) above
and their spouses;
(f) any trust, pension, profit-sharing, IRA, or other benefit plan for any of
such persons mentioned in (a), (b), (c), (d) or (e) (although shares of
the Tax Free Fund should not be purchased by these entities);
(g) custodial accounts for minor children of such persons mentioned in (a),
(b), (c), (d) or (e) pursuant to the Uniform Gifts to Minors or Uniform
Transfers to Minors Acts (although shares of the Tax Free Fund should not
be purchased by these entities);
(h) persons who have received a distribution from a pension, profit-sharing,
or other benefit plan, to the extent such distribution represents the
proceeds of a redemption of shares of any fund managed by SM&R (other than
the Money Market and Primary Funds); and
(i) persons purchasing shares for a federal or state sponsored post-secondary
education funding program.
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YOU HAVE THE SOLE RESPONSIBILITY OF NOTIFYING SM&R THAT YOU INTEND TO QUALIFY
UNDER ONE OF THESE CATEGORIES.
OPENING AN ACCOUNT. Your ability to open a new account depends on the basis of
your eligibility to purchase Class T shares, as follows:
- If you are eligible to purchase Class T shares because you are an existing
shareholder of either the Government Bond Fund or the Tax Free Fund (and
owned shares on December 31, 1998), you can purchase additional Class T
shares of the fund in which you are invested, but cannot open a new
account in another fund. For example, if you own shares of the Government
Bond Fund only (and you owned shares of that fund on December 31, 1998),
you may purchase additional Class T shares of that fund. However, you
cannot purchase Class T shares of the Tax Free Fund.
- If you are a designated person listed in (a)-(i) above, you can open a new
account in Class T shares and may purchase Class T shares of any fund
managed by SM&R. YOU ARE ALSO ELIGIBLE FOR WAIVER OF THE INITIAL SALES
CHARGE AS DESCRIBED BELOW.
CLASS T SALES CHARGES
The offering price of Class T shares is the net asset value plus a "front-end"
sales charge. The sales charge is a percentage of the offering price, as shown
in the following table:
<TABLE>
<CAPTION>
SALES CHARGE
SALES CHARGE AS A % OF
AS A % OF NET AMOUNT
AMOUNT OF INVESTMENT OFFERING PRICE INVESTED
<S> <C> <C>
Less than $100,000 4.5% 4.7%
$100,000 but less than $250,000 3.5% 3.6%
$250,000 but less than $500,000 2.5% 2.6%
$500,000 and over None None
</TABLE>
SALES CHARGE REDUCTIONS AND WAIVERS
DISCOUNTS THROUGH CONCURRENT PURCHASES. To qualify for a reduced sales charge on
Class T shares, you may combine concurrent purchases of Class T shares of funds
managed by SM&R that impose a front-end sales charge. Investors that are
eligible to combine concurrent purchases to qualify for a reduced sales charge
include:
(1) Any individual;
(2) Any individual, his or her spouse, and trusts or custodial accounts for
their minor children;
(3) A trustee or fiduciary of a single trust estate or single fiduciary
account;
(4) Tax-exempt organizations specified in Sections 501(c)(3) or (13) of the
Internal Revenue Code, or employees' trusts, pension, profit-sharing, or
other employee benefit plans qualified under Section 401 of the Internal
Revenue Code; and
(5) Employees (or employers on behalf of employees) under any employee benefit
plan not qualified under Section 401 of the Internal Revenue Code.
Purchases in connection with employee benefit plans not qualified under Section
401 of the Internal Revenue Code will qualify for the above quantity discounts
only if the fund will realize economies of scale.
DISCOUNTS THROUGH A RIGHT OF ACCUMULATION. If you already own Class A or Class T
shares of a fund managed by SM&R on which you paid a front-end sales charge, you
may be able to receive a discount when you buy additional shares. The current
net asset value of the shares you already own may be "accumulated" -- I.E.,
combined together with the dollar amount being invested -- to achieve quantities
eligible for discount.
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LETTER OF INTENT. You may qualify for a reduced sales charge on purchases of
Class T shares of funds managed by SM&R by completing the Letter of Intent
section of the account application. Under a Letter of Intent, an investor
expresses an intention to purchase, within 13 months of the initial investment,
a specified amount of Class T shares of funds managed by SM&R which, if made
concurrently, would qualify for a reduced sales charge. Upon execution of the
Letter of Intent, the investor must make a minimum initial investment equal to
ten percent (10%) of the amount necessary to qualify for the applicable reduced
sales charge. To assure that the full applicable sales charge will be paid if
the intended purchase is not completed, five percent (5%) of the total intended
purchase amount will be held in escrow in shares registered in the investor's
name. Shares held in escrow under a Letter of Intent are not eligible for the
exchange privilege until the Letter of Intent is completed or canceled. A Letter
of Intent does not represent a binding obligation on the part of the investor to
purchase or the funds to sell the full amount of shares specified.
WAIVER OF INITIAL SALES CHARGE FOR CERTAIN PURCHASERS. After SM&R receives a
written request, those designated persons listed in (a)-(i) above may purchase
Class T shares of the Government Bond Fund and the Tax Free Fund at net asset
value per share without the imposition of any sales charge.
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Each fund pursues its own investment objective through various investment
policies and techniques. ONLY THE PRINCIPAL INVESTMENT STRATEGIES OF EACH FUND
AND THE PRINCIPAL TYPES OF SECURITIES EACH FUND PLANS TO PURCHASE ARE DESCRIBED
BELOW. More investment information is in the Statement of Additional
Information. These policies and techniques are not fundamental and may be
changed by the Board of Directors without shareholder approval.
GOVERNMENT BOND FUND
The Government Bond Fund seeks to achieve its objective through investment of
65% or more of its total assets in securities issued or guaranteed by the U.S.
Government, its agencies or instrumentalities ("U.S. Government Obligations")
which include, but are not limited to, U.S. Treasury Bonds, Notes and Bills and
securities issued by instrumentalities of the U.S. Government.
U.S. GOVERNMENT OBLIGATIONS
There are two broad categories of U.S. Government Obligations:
(1) direct obligations of the U.S. Treasury, and
(2) obligations issued or guaranteed by agencies or instrumentalities of the
U.S. Government.
Some obligations issued or guaranteed by agencies or instrumentalities of the
U.S. Government are backed by the full faith and credit of the United States
(such as Government National Mortgage Association Certificates); others, by
the agency or instrumentality with limited rights of the issuer to borrow from
the U.S. Treasury (such as Federal National Mortgage Association Bonds); and
others, only by the credit of the issuer. No assurance can be given that the
U.S. Government would lend money to or otherwise provide financial support to
U.S. Government sponsored instrumentalities; it is not obligated by law to do
so.
MORTGAGE-BACKED SECURITIES
We anticipate that a substantial portion of the Government Bond Fund's
portfolio will consist of mortgage-backed securities issued or guaranteed by
the U.S. Government, its agencies, or instrumentalities. These securities
represent part ownership of pools of mortgage loans secured by real property,
such as certificates issued by the Government National Mortgage Association
("GNMA" or "Ginnie Mae"), the Federal National Mortgage Association ("FNMA" or
"Fannie Mae"), and the Federal Home Loan Mortgage Corporation ("FHLMC" or
"Freddie Mac"). Mortgage-backed securities also include mortgage pass-through
certificates representing participation interests in pools of mortgage loans
originated by the U.S. Government and guaranteed by U.S. Government agencies
such as GNMA, FNMA, or FHLMC. Such certificates, which are ownership interests
in the underlying mortgage loans, differ from conventional debt securities
which provide for periodic payment of interest in fixed amounts and principal
payments at maturity or on specified dates. With pass-through certificates,
both principal and interest payments, including prepayments, are passed
through to the holder of the certificate and provide for monthly payments of
interest and principal. GNMA, a federal agency, issues pass-through
certificates that are guaranteed as to timely payment of principal and
interest. FNMA, a federally chartered and privately owned corporation, issues
mortgage pass-through securities and guarantees them as to timely payment of
principal and interest. FHLMC, a corporate instrumentality of the United
States, issues participation certificates that represent an interest in
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mortgages from FHLMC's portfolio. FHLMC guarantees the timely payment of
interest and the ultimate collection of principal. FNMA and FHLMC are not
backed by the full faith and credit of the United States, although FNMA and
FHLMC are authorized to borrow from the U.S. Treasury to meet their
obligations. Those mentioned are but a few of the mortgage-backed securities
currently available. The Government Bond Fund will not purchase interest-only
or principal-only mortgage-backed securities.
The yield characteristics of mortgage-backed securities differ from
traditional debt securities. Among the major differences are that interest and
principal payments are made more frequently, usually monthly, and that
principal may be prepaid at any time because the underlying mortgage loans
generally may be prepaid at any time. The average mortgage in a pool may be
expected to be repaid within about twelve (12) years. If mortgage interest
rates decrease, the value of the Government Bond Fund's securities will
generally increase. However, we anticipate that the average life of the
mortgages in the pool will decrease as borrowers refinance and prepay
mortgages to take advantage of lower interest rates. The Government Bond Fund
invests the proceeds from such prepayments at the then prevailing lower
interest rates. On the other hand, if interest rates increase, the value of
the Fund's securities generally will decrease while it is anticipated that
borrowers will not refinance and, therefore, the average life of the mortgages
in the pool will be longer. In addition, if the Government Bond Fund purchases
such a security at a premium, a prepayment rate faster than expected will
reduce yield to maturity, while a prepayment rate slower than expected will
have the opposite effect of increasing yield to maturity. Conversely, if the
Government Bond Fund purchases these securities at a discount, faster than
expected prepayments will increase yield to maturity, while slower than
expected prepayments will reduce yield to maturity.
COLLATERALIZED MORTGAGE OBLIGATIONS
The Government Bond Fund may invest a portion of its assets in collateralized
mortgage obligations or "CMOs," which are debt obligations collateralized by a
portfolio or pool of mortgages, mortgage-backed securities, or U.S. Government
securities. Collateralized obligations in which the Government Bond Fund may
invest are issued or guaranteed by a U.S. Government agency or
instrumentality, such as the FHLMC. A variety of types of collateralized
obligations are currently available and others may become available in the
future. One should keep in mind that during periods of rapid interest rate
fluctuation, the price of a security, such as a CMO, could either increase or
decrease based on inherent interest rate risk. Additionally, the risk of
maturities shortening or lengthening in conjunction with interest rate
movement, could magnify the overall effect of the price fluctuation.
A CMO is often issued in multiple classes with varying maturities and interest
rates. As a result the investor may obtain greater predictability of maturity
than with direct investments in mortgage-backed securities. Thus, classes with
shorter maturities may have lower volatility and lower yield while those with
longer maturities may have higher volatility and higher yields. This provides
the investor with greater control over the characteristics of the investment
in a changing interest rate environment. A more complete description of CMOs
is contained in the Statement of Additional Information.
The Government Bond Fund may also invest in parallel pay CMOs and Planned
Amortization
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Class CMOs ("PAC Bonds"). Parallel pay CMOs are structured to provide payments
of principal on each payment date to more than one class. PAC Bonds generally
require payments of a specified amount of principal on each payment date. PAC
Bonds are always parallel pay CMOs with the required principal payment on such
securities having the highest priority after interest has been paid to all
classes.
The Government Bond Fund may also invest in securities issued by private
issuers that represent an interest in or are secured by mortgage-backed
securities issued or guaranteed by the U.S. government or one of its agencies
or instrumentalities. In addition, the fund may invest in securities issued by
private issuers that represent an interest in or are secured by mortgage loans
or mortgage-backed securities without a government guarantee but usually have
some form of private credit enhancement.
ZERO COUPON BONDS
The Government Bond Fund may invest in zero coupon bonds, which are debt
obligations issued or purchased at a significant discount from face value. The
Government Bond Fund will only purchase zero coupon bonds which are U.S.
Government Obligations. The discount approximates the total amount of interest
the bonds will accrue and compound over the period until maturity or the first
interest payment date at a rate of interest reflecting the market rate of the
security at the time of issuance. Zero coupon bonds do not entitle the holder
to any periodic payments of interest prior to maturity. Its value as an
investment consists of the difference between its face value at the time of
maturity and the price for which it was acquired which is generally an amount
significantly less than face value (sometimes referred to as a "deep discount"
price). Zero coupon bonds require a higher rate of return to attract investors
who are willing to defer receipt of cash. Accordingly, although not providing
current income, SM&R believes that zero coupon bonds can be effectively used
to lock in a higher rate of return in a declining interest environment. Such
investments may experience greater volatility in market value than debt
obligations which make regular payments of interest. The Fund will accrue
income on such investments for tax and accounting purposes, as required, which
is distributable to shareholders and which, because no cash is received at the
time of accrual, may require the liquidation of other portfolio securities to
satisfy the Fund's distribution obligations.
TAX FREE FUND
The Tax Free Fund, as a matter of fundamental policy, seeks to achieve its
objective by investing at least 80% of the value of its net assets in municipal
securities the interest on which is exempt from federal income taxes.
The Tax Free Fund has no restrictions on the maturity of municipal securities in
which it may invest. Accordingly, it will seek to invest in municipal securities
of such maturities which, in the judgement of SM&R, the adviser, will provide a
high level of current income consistent with prudent investment, with
consideration given to market conditions.
The Tax Free Fund will invest, without percentage limitations, in municipal
securities having at the time of purchase one of the four highest municipal
ratings by Moody's Investor Service, Inc. ("Moody's"), Standard & Poor's
Corporation ("S&P"), or Fitch IBCA ("Fitch") (E.G., MIG 4 or higher by Moody's)
or in securities which are not rated, provided that, in the opinion of SM&R,
such securities are comparable in quality to those within the four highest
ratings. The rating agencies consider that bonds rated in the fourth highest
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category may have some speculative characteristics and that changes in economic
conditions or other circumstances are more likely to lead to a weakened capacity
to make principal and interest payments on those bonds than is the case with
higher grade bonds. SM&R will only purchase bonds rated in such fourth category
if it believes that the purchase of such bonds is consistent with the Tax Free
Fund's investment objective. In the event the rating of an issue held by the Tax
Free Fund is changed by the rating service, such change will be considered by
the Tax Free Fund in its evaluation of the overall investment merits of that
security but such change will not necessarily result in an automatic sale of the
security. Any security held which is subsequently downgraded below BBB by S&P or
Baa by Moody's will be sold as soon as it is advantageous to do so after the
downgrade. A description of the ratings may be found in the Appendix to this
Prospectus.
Purchasing unrated municipal securities, which may be less liquid than
comparably rated municipal securities, involves somewhat greater risk and
consequently the Tax Free Fund may not invest more than 20% of its net assets in
unrated municipal securities. To attempt to minimize the risk of such
investments, SM&R will, prior to acquiring unrated securities, consider the
terms of the offering and various other factors to determine the issuer's
comparative credit rating and whether the securities are consistent with the Tax
Free Fund's investment objective and policies.
During normal market conditions, the Tax Free Fund will have at least 80% of its
net assets invested in municipal securities the income of which is fully exempt
from federal income taxation. Furthermore, under normal market conditions up to
20% of the Tax Free Fund's net assets, and as a temporary defensive measure
during abnormal market conditions, up to 50% of its net assets may be invested
in the following types of taxable fixed income obligations:
(1) obligations issued or guaranteed by the U.S. government, its agencies,
instrumentalities or authorities (See "Government Bond Fund" above for an
explanation of U.S. government obligations);
(2) corporate debt securities which at the date of the investment are rated A
or higher by Moody's, S&P or Fitch.
(3) commercial paper which at the date of the investment is rated in one of
the two top categories by Moody's or by S&P or if not rated, is issued by
a company which at the date of the investment has an outstanding debt
issue rated A or higher by Moody's or A or higher by S&P;
(4) certificates of deposit issued by U.S. banks which at the date of the
investment have capital surplus and undivided profits of $1 billion as of
the date of their most recently published financial statements; and
(5) repurchase agreements secured by U.S. government securities, provided that
no more than 15% of the Fund's net assets will be invested in illiquid
securities including repurchase agreements with maturities in excess of
seven days.
To the extent income dividends include income from taxable sources, a portion of
a shareholder's dividend income may be taxable. (See "Dividends, Distributions,
and Taxes"). In addition, Congress could enact tax legislation such as a flat
tax rate that would make tax-free bonds less desirable to investors seeking ways
to reduce taxable income. If that were to occur, it could cause the value of the
securities to drop.
The Tax Free Fund's ability to achieve its objective depends partially on the
prompt payment by issuers of the interest on and principal of the
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municipal securities held. A moratorium, default, or other non-payment of
interest or principal when due could, in addition to affecting the market value
and liquidity of the particular security, affect the market value and liquidity
of other municipal securities. Additionally, the market for municipal securities
is often thin and can be temporarily affected by large purchases and sales. As a
result, the Tax Free Fund will attempt to minimize risk by diversifying its
investments by investing no more than 5% of its net assets in the securities of
any one issuer (this limitation does not apply to investments issued or
guaranteed by the U.S. Government or its instrumentalities) and by investing no
more than 25% of its net assets in municipal securities issued in any one state
or territory. Each political subdivision, agency, instrumentality, and each
multi-state agency of which a state is a member will be regarded as a separate
issuer for the purpose of determining diversification.
MUNICIPAL SECURITIES
The term "municipal securities," as used in this Prospectus means obligations
issued by or on behalf of states, territories, and possessions of the U.S. and
the District of Columbia and their political subdivisions, agencies, and
instrumentalities, the interest on which is exempt from federal income tax. An
opinion as to the tax-exempt status of a municipal security generally is
rendered to the issuer by the issuer's counsel at the time of issuance of the
security. Neither the funds nor SM&R will review the proceedings relating to
the issuance of municipal obligations or the basis for opinions of counsel.
Municipal securities are used to raise money for various public purposes such
as constructing public facilities and making loans to public institutions.
Certain types of municipal bonds are issued to obtain funding for privately
operated facilities. Further information on the maturity and funding
classifications of municipal securities is included in the Statement of
Additional Information.
Yields on municipal securities vary, depending on a variety of factors,
including the general condition of the financial markets and of the municipal
securities market, the size of a particular offering, the maturity of the
obligation and the credit rating of the issuer. Like other interest-bearing
securities, the value of municipal securities changes as interest rates
fluctuate. For example, if interest rates increase from the time a security is
purchased, the security's value and sales price generally will be less than
its purchase cost. Conversely, if interest rates decline from the time a
security is purchased, the security's value and sales price may be greater
than its purchase cost. Generally, municipal securities of longer maturities
produce higher current yields than municipal securities with shorter
maturities but are subject to greater price fluctuation due to changes in
interest rates, tax laws and other general market factors. Lower-rated
municipal securities generally produce a higher yield with shorter maturities
than higher-rated municipal securities due to the perception of a greater
degree of risk as to the ability of the issuer to pay principal and interest.
The Tax Free Fund may purchase municipal bonds for which the payments of
principal and interest are secured by an escrow account of securities backed
by the full faith and credit of the U.S. government ("defeased") and municipal
securities whose principal and interest payments are insured by a commercial
insurance company as long as the underlying credit is investment grade (BBB or
better by S&P and Fitch and Baa or better by Moody's) ("insured"). The Tax
Free Fund may also purchase unrated securities of issuers which SM&R believes
would have been rated BBB or Baa had the issuer requested a
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rating from S&P, Fitch or Moody's. Such implied investment grade rating will
be determined by SM&R upon its performance of a credit analysis of the issue
and the issuer. Such credit analysis may consist of a review of such items as
the issuer's debt characteristics, financial information, structure of the
issue, liquidity of the issue, quality of the issuer, current economic
climate, financial adviser, and underwriter. Insured and defeased bonds are
further described in the Statement of Additional Information. In general,
these types of municipal securities will not be treated as an obligation of
the original municipality for purposes of determining industry concentration.
PRIMARY FUND
Commercial paper is short-term unsecured promissory notes issued by corporations
to finance short-term credit needs. Commercial paper is usually sold on a
discount basis and has a maturity at the time of issuance not exceeding nine
months. The Primary Fund will invest only in commercial paper which, at the date
of such investment, is rated in one of the two top categories by one or more of
the nationally recognized statistical rating organizations ("NRSROs") (See the
"Appendix" hereto for information about such ratings and such rating
organizations).
The Primary Fund, consistent with its investment objective, will attempt to
maximize yield by trying to take advantage of changing conditions and trends. It
may also attempt to take advantage of what are believed to be disparities in
yield relationships between different instruments. This procedure may increase
or decrease the portfolio yield depending upon the Primary Fund's ability to
correctly time and execute such transactions. Although the Primary Fund's assets
will be invested in securities with short maturities, the Primary Fund will
manage its portfolio as described above. (See "Portfolio Transactions and
Brokerage Allocation" in the Statement of Additional Information.)
OTHER INVESTMENTS
The Primary Fund may invest in (i) U.S. Government Obligations (See the
"Government Bond Fund" above for an explanation of U.S. Government
Obligations); (ii) other corporate obligations, such as bonds, debentures or
notes maturing in five (5) years or less at the time of purchase which at the
date of the investment are rated "A" or higher by an NRSRO; and (iii)
negotiable certificates of deposit of banks (including U.S. dollar denominated
obligations of foreign branches of U.S. banks and U.S. branches of foreign
banks and savings and loan associations and banker's acceptances of U.S. banks
which banks and savings and loan associations have total assets at the date of
investment (as of the date of their most recent published financial
statements) of at least $1 billion (See "INVESTMENT OBJECTIVES AND POLICIES --
Certificates of Deposit and Banker's Acceptance" in the Statement of
Additional Information for a description of the securities) and (iv)
repurchase agreements with respect to any type of instrument in which the
Primary Fund is authorized to invest even though the underlying instrument may
mature in more than two (2) years.
MONEY MARKET FUND
The Money Market Fund seeks to achieve its objective by investing in short-term
money market instruments determined to be of high quality by SM&R pursuant to
guidelines established by the
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Company's Board of Directors. The Money Market Fund may invest in the following
types of high quality debt obligations:
(1) U.S. GOVERNMENT OBLIGATIONS. U.S. Government Obligations consist of
marketable securities issued or guaranteed as to both principal and
interest by the United States Government or by its agencies and
instrumentalities. (See "Government Bond Fund" above for an explanation of
U.S. Government Obligations).
(2) CERTIFICATES OF DEPOSIT. Certificates of deposit are negotiable
certificates issued against funds deposited in a commercial bank for a
definite period of time and earning a specified return. The Money Market
Fund will invest only in certificates of deposit of U.S. banks that have
total assets in excess of $1 billion at the time of investment.
(3) BANKER'S ACCEPTANCES. Banker's acceptances are short-term instruments
issued by banks, generally for the purpose of financing imports or
exports. An acceptance is a time draft drawn on a bank by the importer or
exporter to obtain a stated amount of funds to pay for specific
merchandise. The draft is then "accepted" and is an irrevocable obligation
of the issuing bank.
(4) COMMERCIAL PAPER. As discussed above under "Primary Fund," commercial
paper is short-term unsecured promissory notes issued by corporations to
finance short-term credit needs.
(5) BONDS AND NOTES. The Money Market Fund may invest in corporate bonds or
notes with a remaining maturity of one year or less.
(6) COLLATERALIZED MORTGAGE OBLIGATIONS. As discussed above under "Government
Bond Fund," CMOs are debt obligations collateralized by a portfolio or
pool of mortgages, mortgage-backed securities, or U.S. Government
securities.
The Money Market Fund does not currently intend to invest in unrated securities,
securities subject to demand features, floating rate instruments, securities
subject to guarantees, and variable rate instruments.
The Money Market Fund limits its investments to those short-term securities that
the Board determines present minimal credit risk and that are "Eligible
Securities" when acquired by the Fund. As used in this Prospectus, "Eligible
Securities" means securities that are:
(a) rated in one of the two highest short-term rating categories, or
(b) whose issuer has another class of debt obligations rated in one of the two
highest short-term rating categories.
To rely on a rating assigned to other debt obligations, those obligations must
be of comparable priority and security. All ratings must have been issued by the
requisite NRSROs. Currently, five organizations are NRSROs: Moody's, S&P, Fitch
IBCA, Duff and Phelps, Inc., and Thomson BankWatch, Inc. A discussion of the
ratings categories of S&P and Moody's is contained in the Appendix.
The Money Market Fund generally limits its investments in securities, as
follows:
- It will not invest in securities issued by any one issuer, other than the
U.S. Government, its agencies, or instrumentalities, in an amount that
exceeds 5% of its total assets.
- It will not invest more than 5% of its total assets in securities relying on
ratings in the second highest rating category.
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- It will not invest more than 1% of its total assets in securities of any one
issuer that rely on ratings in the second highest rating category.
(See "Investment Objectives and Policies" in the Statement of Additional
Information for a more detailed explanation of the investment categories.) The
Fund will maintain a dollar-weighted average portfolio maturity of 90 days or
less, and will not invest in any security with a remaining maturity of over 397
days (13 months).
Investments in money market instruments are subject to the ability of the issuer
to make payment at maturity. In addition, the Money Market Fund's performance
will vary depending on changes in short-term interest rates. However, both the
financial and market risks of investment in the Money Market Fund may be
expected to be less than for any other Fund. By limiting its investments to
Eligible Securities, the Money Market Fund may not achieve as high a level of
current income as a fund investing in lower-rated securities.
21
<PAGE>
OTHER RISK FACTORS
-------------------------------------------------------------------
In addition to the common risk factors discussed earlier, the funds may also be
subject to one or more of the following risks.
DEBT SECURITIES RISKS.
Debt securities are subject to change in their values due to changes in
prevailing interest rates. The magnitude of these fluctuations will often be
greater for longer-term debt securities than shorter-term debt securities.
When prevailing interest rates fall, the values of already-issued debt
securities generally rise. Accordingly, if interest rates go down after a
security is purchased, such security might be valued and/or sold at a price
greater than its cost. If interest rates were to drop dramatically, some of
the securities could be called and/or prepaid, requiring reinvesting in
securities at much lower yields.
On the other hand, when prevailing interest rates rise, the values of
already-issued debt securities generally fall. Accordingly, if interest rates
increase after a security is purchased, such security might be valued and/or
sold at a price less than its cost. In such circumstances, the value of
existing bonds decrease because the interest payments from existing bonds are
less attractive than new issues with higher interest rates and investors would
lose money if they liquidate holdings.
The funds could lose money if any bonds they own are downgraded in credit
rating or go into default. A moratorium, default, or other non-payment of
interest or principal when due could, in addition to affecting the market
value and liquidity of the particular security, affect the market value and
liquidity of other securities. A change in credit rating of an issuer can also
affect the bond's value, thus affecting the market value of the funds.
However, the funds invest predominately in investment grade bonds in order to
minimize credit risk. (See "Investment Objectives and Policies" for more
information about the ratings required for investments by each specific fund.)
Moreover, substantial redemptions of fund shares could require a fund to sell
portfolio securities at a time when a sale might not be favorable.
U.S. GOVERNMENT OBLIGATIONS.
Investments in U.S. Government Obligations are not all backed by the "full
faith and credit" of the United States Government. Some are backed only by the
rights of the issuer to borrow from the U.S. Treasury and others are supported
only by the credit of the issuing instrumentality. No assurance can be given
that the U.S. Government would lend money to or otherwise provide financial
support to U.S. Government sponsored instrumentalities.
MARKET RISKS.
Because the funds may invest in debt obligations which are traded on
securities exchanges, the value of each fund's portfolio will be affected by
changes in the stock markets. At times, the stock markets can be volatile and
stock prices can change substantially. This market risk will affect each
fund's net asset value per share, which will fluctuate as the values of each
fund's portfolio securities change. Prices do not always change uniformly or
at the same time and the various stock markets do not always move in the same
direction at the same time. Other factors specific to a particular company
also affect the price of that company's debt obligations (for example, poor
earnings, loss of major customers, or major litigation). The funds cannot
always predict the factors that will affect a security's price. The funds,
however, do attempt to limit market risk by diversifying their investments.
The funds diversify their investments by generally investing only a small
percentage of their assets in the
22
<PAGE>
OTHER RISK FACTORS
-------------------------------------------------------------------
debt obligations of any one company and by not holding a substantial amount of
the debt obligations of any one company.
REPURCHASE AGREEMENTS.
In a repurchase agreement, a fund buys a security and simultaneously sells it
to the vendor for delivery at a future date. These agreements are used
primarily for cash purposes. A fund entering into a repurchase agreement may
lose money if the other party to the transaction fails to pay the resale price
on the delivery date. Such a default may delay or prevent the fund from
disposing of the underlying securities. The value of the underlying securities
may go down during the period in which the fund seeks to dispose of them.
Also, the fund may incur expenses while trying to sell the underlying
securities. Finally, the fund risks losing all or a part of the income from
the agreement.
23
<PAGE>
THE FUNDS AND THEIR MANAGEMENT
-------------------------------------------------------------------
INVESTMENT ADVISOR
The Company's Board of Directors has delegated to Securities Management and
Research, Inc. ("SM&R"), the funds' investment adviser, the management of the
funds' day-to-day business and affairs. In addition, SM&R invests the funds'
assets, provides administrative services, and serves as transfer agent,
custodian, dividend paying agent, and underwriter.
SM&R is a wholly-owned subsidiary of American National Insurance Company
("American National"). SM&R was incorporated in 1964 and has managed mutual
funds since 1966. SM&R does and may, from time to time, serve as investment
adviser to other clients including employee benefit plans, other investment
companies, banks, foundations and endowment funds.
The Funds pay SM&R an investment advisory fee, which is calculated daily for
each fund and paid monthly. The advisory agreement between the Company and SM&R
spells out the management fee and other expenses that the Funds must pay.
The Government Bond and Tax Free Fund each pay a management fee based on the
following schedule:
<TABLE>
<CAPTION>
INVESTMENT
ON THE PORTION OF EACH FUND'S ADVISORY FEE
AVERAGE DAILY NET ASSETS ANNUAL RATE
<S> <C>
Not exceeding $100,000,000 0.50%
Exceeding $100,000,000 but not exceeding
$300,000,000 0.45%
Exceeding $300,000,000 0.40%
</TABLE>
The Money Market and Primary Funds pay SM&R a management fee calculated at the
annual rate of 0.25% and 0.50%, respectively, of each Fund's average daily net
asset value.
After applicable fee waivers, SM&R received total advisory fees from the
Government Bond Fund and Primary Fund for the fiscal year ended August 31, 1999
which represented % and %, respectively, of each such fund's average daily
net assets. SM&R waived all advisory fees for the Tax Free Fund for the fiscal
year ended August 31, 1999.
ADMINISTRATIVE SERVICES
The Funds pay SM&R an administrative service fee for non-investment related
management, executive, administrative, transfer agent, and operation services to
the funds. Each fund is subject to an administrative service fee at the annual
rate of average daily net asset values as follows:
<TABLE>
<CAPTION>
AVERAGE DAILY NET ASSETS ANNUAL PERCENTAGE
OF EACH FUND RATE
<S> <C>
Not exceeding $100,000,000 0.25%
Exceeding $100,000,000 but not exceeding
$200,000,000 0.20%
Exceeding $200,000,000 but not exceeding
$300,000,000 0.15%
Exceeding $300,000,000 0.10%
</TABLE>
REIMBURSEMENTS AND WAIVERS
SM&R has agreed to pay (or to reimburse each fund for) each fund's regular
operating expenses in excess of 1.25% (0.50% for the Money Market Fund) per year
of such fund's average daily net assets. Regular operating expenses include the
advisory fee and administrative service fee, if any, paid to SM&R, but do not
include 12b-1 fees, class-specific expenses, interest, taxes, commissions, and
other expenses incidental to portfolio transactions. SM&R received
administrative service fees of % for the fiscal year ended August 31, 1999 of
each fund's average daily net assets.
In order to improve the yield and total return of any fund, SM&R may from time
to time voluntarily waive or reduce all or any portion of its advisory fee,
administrative fee, and/or assume certain or all expenses of any fund of the
Company while retaining its ability to be reimbursed for such fees prior to the
end of the fiscal year. Fee waivers and/or reductions, other than those stated
in the
24
<PAGE>
THE FUNDS AND THEIR MANAGEMENT
-------------------------------------------------------------------
Administrative Service Agreement, may be rescinded by SM&R at any time without
notice to investors. SM&R has agreed to continue to waive the advisory fee for
the Tax Free Fund and reimburse expenses incurred by the Government Bond and
Primary Funds to the extent that regular operating expenses exceed average daily
net assets as follows: 0.80% for the Primary Fund and 1.00% for the Government
Bond Fund.
PORTFOLIO MANAGEMENT
While the following individuals are primarily responsible for the day-to-day
portfolio management of their respective funds, all accounts are reviewed on a
regular basis by SM&R's Investment Committee to ensure that they are being
invested in accordance with investment policies.
TERRY E. FRANK, VICE PRESIDENT, PORTFOLIO MANAGER OF THE GOVERNMENT BOND FUND,
TAX FREE FUND, PRIMARY FUND AND MONEY MARKET FUND. Ms. Frank has served as
Portfolio Manager of the Government Bond Fund since 1993 and the Tax Free Fund
since its inception. She joined SM&R's investment staff in 1991 and prior to
that time she held positions with American Capital Asset Management and
Gibraltar Savings Association as a securities analyst and Equitable Investment
Services as a research analyst.
She has served as Portfolio Manager of the Primary Fund since November 1998
and the Money Market Fund since its inception January 1, 1999. She also serves
as Portfolio Manager of the Money Market Portfolio of American National
Investment Accounts, Inc., a series mutual fund used exclusively for variable
contracts issued by American National.
JOHN S. MAIDLOW, ASSISTANT PORTFOLIO MANAGER OF THE PRIMARY FUND AND THE MONEY
MARKET FUND. Mr. Maidlow has served as the Assistant Portfolio Manager of the
Primary Fund since November, 1998 and the Money Market Fund since its
inception January 1, 1999. He also serves as Assistant Portfolio Manager of
the Money Market Portfolio of American National Investment Accounts, Inc., a
series mutual fund used exclusively for variable contracts issued by American
National. He joined SM&R's staff in 1998 and prior to that time he held
positions with American Industries Trust Company as a trust officer, Texas
Department of Insurance and the Texas Department of Banking as an examiner,
Landmark Group as Vice President of Investments, MBank as a trust officer and
Rotan-Mosle, Inc. and Eppler, Guerin & Turner as an investment broker.
25
<PAGE>
FINANCIAL HIGHLIGHTS
-------------------------------------------------------------------
UNDERSTANDING THE FINANCIAL HIGHLIGHTS
The table on the next page itemizes what contributed to the changes in the share
price during the period. It also shows the changes in share price for this
period in comparison to changes over the last five fiscal years or less, if the
fund is not five years old.
On a per-share basis, the table includes as appropriate
- share price at the beginning of the period
- investment income and capital gains or losses
- distributions of income and capital gains paid to shareholders
- share price at the end of the period
The table also includes some key statistics for the period as appropriate
- Total Return -- the overall percentage of return of the fund, assuming the
reinvestment of all distributions
- Expense Ratio -- operating expenses as a percentage of average net assets
- Net Income Ratio -- net investment income as a percentage of average net
assets
- Portfolio Turnover -- the percentage of the fund's buying and selling
activity
The Financial Highlights have been audited by the Fund's independent auditors,
Tait, Weller & Baker, LLP. Their Independent Auditor's Report is included in the
fund's annual report for the year ended August 31, 1999, which is incorporated
by reference into the Statement of Additional Information and is available upon
request.
26
<PAGE>
FINANCIAL HIGHLIGHTS
-------------------------------------------------------------------
GOVERNMENT BOND FUND
The following financial highlights table is intended to help you understand the
Government Bond Fund's financial performance for the past five years. Certain
information reflects financial results for a single share outstanding throughout
each period shown. The total returns in the table represent the rate that an
investor would have earned (or lost) on an investment in the Government Bond
Fund (assuming reinvestment of all dividends and distributions) prior to
addition of multiple classes of shares, but do not reflect any sales loads that
would be imposed on the purchase or sale of any shares. This information is
derived from the financial statements of the Government Bond Fund which for the
years ended through August 31, 1997 have been audited by KPMG Peat Marwick LLP
and for the years ended August 31, 1999 has been audited by Tait, Weller &
Baker, CPA. Each independent auditor's report, along with the Government Bond
Fund's financial statements, are incorporated by reference into the Statement of
Additional Information, which is available upon request.
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
YEAR ENDED AUGUST 31,
----------------------------------------------------
1999 1998 1997 1996 1995
<S> <C> <C> <C> <C> <C>
- -------------------------------------------------------------------------------
NET ASSET VALUE,
BEGINNING OF PERIOD $ 10.42 $ 10.14 $ 10.51 $ 10.07
-------- -------- -------- -------- --------
-------- -------- -------- -------- --------
- -------------------------------------------------------------------------------
INCOME FROM INVESTMENT
OPERATIONS
Net investment income 0.64 0.67 0.65 0.70
- -------------------------------------------------------------------------------
Net realized and
unrealized gain (loss) on
securities 0.20 0.26 (0.37) 0.44
- -------------------------------------------------------------------------------
Total from investment
operations 0.84 0.93 0.28 1.14
- -------------------------------------------------------------------------------
LESS DISTRIBUTIONS
Dividends from net
investment income (0.66) (0.65) (0.65) (0.70)
- -------------------------------------------------------------------------------
Total distributions (0.66) (0.65) (0.65) (0.70)
- -------------------------------------------------------------------------------
NET ASSET VALUE, END OF
PERIOD $ 10.60 $ 10.42 $ 10.14 $ 10.51
-------- -------- -------- -------- --------
-------- -------- -------- -------- --------
- -------------------------------------------------------------------------------
TOTAL RETURN 8.31% 9.37% 2.63% 11.85%
- -------------------------------------------------------------------------------
RATIOS/SUPPLEMENTAL DATA
NET ASSETS, END OF PERIOD
(000'S OMITTED) $23,982 $23,683 $21,127 $20,466
- -------------------------------------------------------------------------------
Ratio of expenses to
average net assets(1) 1.00% 1.00% 1.00% 0.70%
- -------------------------------------------------------------------------------
Ratio of net income to
average net assets 6.08% 6.46% 6.17% 6.90%
- -------------------------------------------------------------------------------
PORTFOLIO TURNOVER RATE 32.71% 9.06% 30.17% 2.20%
- -------------------------------------------------------------------------------
</TABLE>
(1) Expenses for the calculation are net of a reimbursement from Securities
Management and Research, Inc. Without this reimbursement, the ratio of
expenses to average net assets would have been 1.07%, 1.20%, and 1.06% for
the years ended August 31, 1997, 1996, and 1995, respectively.
27
<PAGE>
FINANCIAL HIGHLIGHTS
-------------------------------------------------------------------
TAX FREE FUND
The following financial highlights table is intended to help you understand the
Tax Free Fund's financial performance since inception. Certain information
reflects financial results for a single share outstanding throughout each period
shown. The total returns in the table represent the rate that an investor would
have earned (or lost) on an investment in the Tax Free Fund (assuming
reinvestment of all dividends and distributions) prior to addition of multiple
classes of shares, but do not reflect any sales loads that would be imposed on
the purchase or sale of any shares. This information is derived from the
financial statements of the Tax Free Fund which for the years ended through
August 31, 1997 have been audited by KPMG Peat Marwick LLP and for the years
ended August 31, 1999 has been audited by Tait, Weller & Baker, CPA. Each
independent auditor's report, along with the Tax Free Fund's financial
statements, are incorporated by reference into the Statement of Additional
Information, which is available upon request.
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
YEAR ENDED AUGUST 31,
-------------------------------------------------------------
1999 1998 1997 1996 1995
<S> <C> <C> <C> <C> <C>
- ----------------------------------------------------------------------------------------
NET ASSET VALUE,
BEGINNING OF PERIOD $ 10.27 $ 9.93 $ 9.95 $ 9.62
-------- -------- -------- -------- -------
-------- -------- -------- -------- -------
- ----------------------------------------------------------------------------------------
INCOME FROM INVESTMENT
OPERATIONS
Net investment income 0.49 0.51 0.53 0.51
- ----------------------------------------------------------------------------------------
Net realized and
unrealized gain (loss) on
securities 0.37 0.33 (0.02) 0.33
- ----------------------------------------------------------------------------------------
Total from investment
operations 0.86 0.84 0.51 0.84
- ----------------------------------------------------------------------------------------
LESS DISTRIBUTIONS
Dividends from net
investment income (0.49) (0.50) (0.53) (0.51)
- ----------------------------------------------------------------------------------------
Total distributions (0.49) (0.50) (0.53) (0.51)
- ----------------------------------------------------------------------------------------
NET ASSET VALUE, END OF
PERIOD $ 10.64 $ 10.27 $ 9.93 $ 9.95
-------- -------- -------- -------- -------
-------- -------- -------- -------- -------
- ----------------------------------------------------------------------------------------
TOTAL RETURN 8.58% 8.61% 5.18% 9.15%
- ----------------------------------------------------------------------------------------
RATIOS/SUPPLEMENTAL DATA
NET ASSETS, END OF PERIOD
(000'S OMITTED) $11,058 $10,700 $9,148 $8,399
- ----------------------------------------------------------------------------------------
Ratio of expenses to
average net assets(3) 0.75% 0.54% -- --
- ----------------------------------------------------------------------------------------
Ratio of net income to
average net assets 4.60% 4.97% 5.27% 5.43%
- ----------------------------------------------------------------------------------------
PORTFOLIO TURNOVER RATE 12.77% 22.15% 18.44% 12.63%
- ----------------------------------------------------------------------------------------
</TABLE>
(1) Returns are not annualized.
(2) Ratios are annualized.
(3) Expenses for the calculation are net of a reimbursement from Securities
Management and Research, Inc. Without this reimbursement, the ratio of
expenses to average net assets would have been %, 1.25%, 1.27%, 1.18%,
and 1.25% for the years ended August 31, 1999, 1998, 1997, 1996, and 1995,
respectively.
28
<PAGE>
FINANCIAL HIGHLIGHTS
-------------------------------------------------------------------
PRIMARY FUND
The following financial highlights table is intended to help you understand the
Primary Fund's financial performance for the past five years. Certain
information reflects financial results for a single Primary Fund share
outstanding throughout each period shown. The total returns in the table
represent the rate that an investor would have earned (or lost) on an investment
in the Primary Fund (assuming reinvestment of all dividends and distributions).
This information is derived from the financial statements of the Primary Fund
which for the years ended through August 31, 1997 have been audited by KPMG Peat
Marwick LLP and for the years ended August 31, 1999 has been audited by Tait,
Weller & Baker, CPA. Each independent auditor's report, along with the Primary
Fund's financial statements, are incorporated by reference into the Statement of
Additional Information, which is available upon request.
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
YEAR ENDED AUGUST 31,
----------------------------------------------------
1999 1998 1997 1996 1995
<S> <C> <C> <C> <C> <C>
- -------------------------------------------------------------------------------
NET ASSET VALUE,
BEGINNING OF PERIOD $ 1.00 $ 1.00 $ 1.00 $ 1.00
-------- -------- -------- -------- --------
-------- -------- -------- -------- --------
- -------------------------------------------------------------------------------
INCOME FROM INVESTMENT
OPERATIONS
Net investment income 0.05 0.05 0.05 0.05
- -------------------------------------------------------------------------------
Total from investment
operations 0.05 0.05 0.05 0.05
- -------------------------------------------------------------------------------
LESS DISTRIBUTIONS
Dividends from net
investment income (0.05) (0.05) (0.05) (0.05)
- -------------------------------------------------------------------------------
Total distributions (0.05) (0.05) (0.05) (0.05)
- -------------------------------------------------------------------------------
NET ASSET VALUE, END OF
PERIOD $ 1.00 $ 1.00 $ 1.00 $ 1.00
-------- -------- -------- -------- --------
-------- -------- -------- -------- --------
- -------------------------------------------------------------------------------
TOTAL RETURN 5.15% 4.98% 5.07% 5.01%
- -------------------------------------------------------------------------------
RATIOS/SUPPLEMENTAL DATA
NET ASSETS, END OF PERIOD
(000'S OMITTED) $34,577 $33,045 $37,465 $20,984
- -------------------------------------------------------------------------------
Ratio of expenses to
average net assets(1) 0.80% 0.80% 0.81% 0.84%
- -------------------------------------------------------------------------------
Ratio of net income to
average net assets 5.02% 4.86% 4.93% 4.91%
- -------------------------------------------------------------------------------
</TABLE>
(1) Expenses for the calculation are net of a reimbursement from Securities
Management and Research, Inc. Without this reimbursement the ratio of
expenses to average net assets would have been %, 0.98%, 1.01%, 1.15%,
1.21%, and 1.20% for the years ended August 31, 1999, 1998, 1997, 1996, and
1995, respectively.
29
<PAGE>
FINANCIAL HIGHLIGHTS
-------------------------------------------------------------------
MONEY MARKET FUND
The following financial highlights table is intended to help you understand the
Money Market Fund's financial performance for the past five years. Certain
information reflects financial results for a single Money Market Fund share
outstanding throughout each period shown. The total returns in the table
represent the rate that an investor would have earned (or lost) on an investment
in the Money Market Fund (assuming reinvestment of all dividends and
distributions). This information is derived from the financial statements of the
Money Market Fund which for the period shown below has been audited by Tait,
Weller & Baker, CPA. The independent auditor's report, along with the Money
Market Fund's financial statements, are incorporated by reference into the
Statement of Additional Information, which is available upon request.
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
PERIOD
FROM
JANUARY
1, 1999
TO
AUGUST
31,
--------
1999
<S> <C>
- ------------------------------------------------------------
NET ASSET VALUE, BEGINNING OF PERIOD $
--------
--------
- ------------------------------------------------------------
INCOME FROM INVESTMENT OPERATIONS
Net investment income
- ------------------------------------------------------------
Total from investment operations
- ------------------------------------------------------------
LESS DISTRIBUTIONS
Dividends from net investment income
- ------------------------------------------------------------
Total distributions
- ------------------------------------------------------------
NET ASSET VALUE, END OF PERIOD $
--------
--------
- ------------------------------------------------------------
TOTAL RETURN %
- ------------------------------------------------------------
RATIOS/SUPPLEMENTAL DATA
NET ASSETS, END OF PERIOD (000'S OMITTED)
- ------------------------------------------------------------
Ratio of expenses to average net assets(1) %
- ------------------------------------------------------------
Ratio of net income to average net assets %
- ------------------------------------------------------------
</TABLE>
30
<PAGE>
SHAREHOLDER'S GUIDE TO INVESTING WITH SM&R'S MUTUAL FUNDS
-------------------------------------------------------------------
IMPORTANT SHAREHOLDER FACTS AND INFORMATION
THIS SECTION OF THE PROSPECTUS IS PROVIDED TO HELP YOU BECOME FAMILIAR WITH THE
TYPES OF ACCOUNTS AND SERVICES AVAILABLE IN THE SM&R MUTUAL FUNDS. IT EXPLAINS
THE VARIOUS SERVICES AND FEATURES YOU CAN ESTABLISH AS PART OF YOUR ACCOUNT IN
THE "FUNDS" AS WELL AS ACCOUNT POLICIES AND FEES THAT MAY APPLY TO YOUR ACCOUNT.
WEB SITE: www.smrinvest.com
BUSINESS HOURS:
8:00 A.M. TO 4:30 P.M. CENTRAL TIME
EACH DAY THE NEW YORK STOCK EXCHANGE IS OPEN FOR TRADING ("REGULAR
TRADING DAY")
24-HOUR ACCESS TO ACCOUNT INFORMATION. SEE "VOICE RESPONSE UNIT" UNDER
"OTHER SERVICES"
MAILING ADDRESS:
SECURITIES MANAGEMENT AND RESEARCH, INC.
P.O. BOX 58969
HOUSTON, TEXAS 77258-8969
OVERNIGHT MAILING ADDRESS AND STREET ADDRESS:
SECURITIES MANAGEMENT AND RESEARCH, INC.
2450 SOUTH SHORE BOULEVARD, SUITE 400
LEAGUE CITY, TEXAS 77573
IMPORTANT PHONE NUMBERS:
VOICE RESPONSE:
877-239-2049
INVESTOR SERVICES DEPARTMENT:
1-800-231-4639
FAX NUMBERS:
TRANSFER AGENCY:
1-281-538-4983
WIRING INSTRUCTIONS:
MOODY NATIONAL BANK OF GALVESTON
ABA #113100091
SECURITIES MANAGEMENT AND RESEARCH, INC.
#035 868 9
NAME OF CLASS AND FUND (E.G. CLASS A OF THE GOVERNMENT BOND FUND)
FUND ACCOUNT NUMBER (NUMBER APPEARS ON YOUR CONFIRMATION STATEMENT)
YOUR NAME (E.G., MARY SMITH)
THIRD PARTY CHECKS
To prevent fraud, SM&R will not accept checks made payable to third parties to
open new accounts. Tax-deferred rollover checks, properly endorsed, will be
accepted.
MINIMUM INVESTMENT AMOUNTS:
The Funds' low investment minimums make investing easy. Once you decide on a
fund, an investment amount, and a share class simply talk to your
representative or broker-dealer, or fill out an application and send in your
investment.
The Funds reserve the right to change the amount of these minimums from time
to time or to waive them in whole or in part for certain types of accounts.
<TABLE>
<CAPTION>
INITIAL ADDITIONAL
<S> <C> <C>
Regular Accounts $ 100 $ 20
Automatic Investment Plan $ 100 $ 20
Retirement Plans $ 100 $ 20
Primary and Money Market Funds $ 1,000 $100
</TABLE>
CERTIFICATES
Share certificates are not issued by the Funds. Your purchases are maintained
on the records of the Funds in book shares. This provides you with easy access
to your shares. You have the same rights of share ownership as you would if
certificates had been issued.
SPECIAL FEES:
- Tax-deferred: $7.50 per account deducted annually
- Wiring fee: $10.00 for wire redemption proceeds under $10,000
SIGNATURE GUARANTEE REQUIREMENTS:
Required on all redemptions in amounts of $50,000 or more. Other requirements
apply, see page .
CHECK WRITING OPTION:
Available in the SM&R Money Market Fund only. Refer to "Important Facts About
Redeeming"
TELEPHONE SERVICES:
SM&R will automatically establish a telephone redemption/exchange option for
all non-qualified and non-tax deferred accounts, unless you instruct us not to
do so. These services are not available to participants of post-secondary
education programs. Refer to "Telephone Services"
PLEASE KEEP IN MIND THAT THE ACCOUNT POLICIES (INCLUDING FEES), SERVICES AND
FEATURES MAY BE MODIFIED OR DISCONTINUED WITHOUT SHAREHOLDER APPROVAL OR PRIOR
NOTICE. DURING TIMES OF ECONOMIC TURMOIL OR MARKET VOLATILITY, SEVERE WEATHER,
OR NATURAL DISASTER YOU MAY NOT BE ABLE TO REACH SM&R BY TELEPHONE TO INSTITUTE
A REDEMPTION OR EXCHANGE.
31
<PAGE>
SHAREHOLDER'S GUIDE TO INVESTING WITH SM&R'S MUTUAL FUNDS
-------------------------------------------------------------------
TYPES OF ACCOUNTS AVAILABLE
BELOW IS A BRIEF EXPLANATION OF THE DIFFERENT ACCOUNTS AVAILABLE IN THE FUNDS.
INDIVIDUAL OR JOINT OWNERSHIP
Individual accounts are owned by one person. Joint accounts have two or more
owners.
A UNIFORM GIFT OR TRANSFER TO MINOR (UGMA OR UTMA)
An UGMA/UTMA account is a custodial account managed for the benefit of a
minor. To open an UGMA or UTMA account, you must include the minor's Social
Security number on the application.
TRUST
An established trust can open an account. The names of each trustee, the
name of the trust and the date of the trust agreement must be included on
the application.
BUSINESS ACCOUNTS
Corporations, partnerships, and sole proprietorships may also open an
account. The application must be signed by an authorized officer of the
corporation or a general partner or owner of the business.
TAX-DEFERRED ACCOUNTS
If you are eligible, you may set up one or more tax-deferred accounts. A
tax-deferred account allows you to shelter your investment income and capital
gains from current income taxes, while saving for retirement. A contribution
to certain types of these plans may also be tax deductible. Tax-deferred
accounts include retirement plans described below and the Education IRA.
Distributions from these plans are generally subject to income tax and may be
subject to an additional tax if withdrawn prior to age 59 1/2 or used for a
non-qualifying purpose. Information concerning IRAs and TSAs, and the forms
necessary to adopt such plans, can be obtained by contacting your registered
representative, your broker-dealer, or by calling SM&R. Investors should
consult their tax adviser or legal counsel before selecting a tax-deferred
account.
Because IRAs, SEPs, TSAs, and other tax-deferred accounts are exempt from
federal income tax, they will not benefit from the tax-exempt nature of the
Tax Free Fund. Accordingly, the Tax Free Fund is not considered to be suited
for these types of accounts.
Securities Management and Research, Inc. serves as custodian for the
tax-deferred accounts offered by the funds. You will be charged an annual
account maintenance fee of $7.50 for each tax-deferred account you have. The
fee will be automatically deducted from your account (usually in the last
quarter). The custodian reserves the right to change the amount of this fee or
to waive it in whole or in part for certain types of accounts.
TRADITIONAL INDIVIDUAL RETIREMENT ACCOUNTS
Traditional IRAs allow most individuals with earned income to contribute up
to the lesser of $2000 or 100% of compensation annually.
ROTH INDIVIDUAL RETIREMENT ACCOUNTS
Roth IRAs allow most individuals with earned income to contribute up to the
lesser of $2000 or 100% of compensation annually.
EDUCATION IRA
This plan allows individuals, subject to certain income limitations, to
contribute up to $500 annually per child under the age of 18.
SIMPLIFIED EMPLOYEE PENSION PLAN
This plan allows small business owners (including sole proprietors) to make
tax-deductible contributions for themselves and any eligible employee(s). A
SEP requires an IRA (a SEP-IRA) to be set up for each SEP participant.
SIMPLE
This plan allows employee pre-tax contributions up to $6,000 annually and
may be matched by the employer up to a maximum of 3% of employees'
compensations.
PROFIT SHARING OR MONEY PURCHASE PENSION PLAN
These plans are open to corporations, partnerships and sole proprietors to
benefit their employees and themselves.
SECTION 403(b)(7) PLAN
Employees of educational organizations or other qualifying, tax-exempt
organizations may be eligible to participate in a Section 403(b)(7) Plan.
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PRICING OF FUND SHARES
GENERAL (HOW SHARES ARE PRICED). Each Fund's offering price is calculated once
each day the New York Stock Exchange (the "Exchange") is open for regular
trading. The offering price equals a fund's net asset value plus the sales
charge, if any, computed at the rate set forth in the applicable tables for
the classes. (See "Sales Charge Reductions and Waivers.") You may purchase
shares of the SM&R Primary Fund and SM&R Money Market Fund without a sales
charge. Accordingly, the offering price for shares of these funds is net asset
value.
Although the legal rights of the Class A, B, and C shares are substantially
identical, the different expenses borne by each class will result in different
net asset values and dividends. The net asset value of the Class B and C
shares generally will be lower than the Class A shares as a result of
differences in service and distribution (12b-1) fees charged.
A NOTE ON PRICING. The Government Bond, Tax Free and Primary Fund's investments
will be priced at their market value when market quotations are readily
available. When these quotations are not readily available, investments will
be priced at their fair value, calculated according to procedures adopted by
the Funds' Board of Directors. The Funds also may use fair value pricing if
the value of a security held by the Fund is materially affected by events
occurring after the close of regular trading of the primary markets or
exchanges on which the security is traded. In these situations, prices used by
the Fund to calculate its net asset value may differ from quoted or published
prices for the underlying securities. The Money Market Fund uses the amortized
cost method for valuing its securities.
SHARE PRICE -- EFFECTIVE DATE OF PURCHASES AND REDEMPTIONS. Each Fund's share
price, called its net asset value, or NAV, is calculated once each day at the
close of regular trading (currently 3:00 p.m. Central Time). NAV is not
calculated on holidays or other days the Exchange is closed. In the event the
Exchange closes early on a particular day, we will determine the net asset
value of the Funds as of such earlier closing time. Below is the method used
by the Funds to calculate the NAV on any given day.
<TABLE>
<S> <C> <C>
Total Assets - Liabilities
Net Asset Value = --------------------------
Number of Shares Outstanding
</TABLE>
Knowing the daily net asset value is useful to you as a shareholder because it
indicates the current value of your investment. Each Fund's NAV, multiplied by
the number of shares you own, gives you the dollar amount you would have
received had you sold all of your shares back to the Fund that day.
The price you pay or receive for shares of a Fund depends, in part, on the day
and time you make your purchase or redemption. Purchases and redemptions will be
executed on each day the Exchange is open for regular trading at the next NAV
determined THAT DAY if:
- SM&R receives your request in good order prior to the close of the regular
trading day;
- a securities dealer having a dealer contract with SM&R receives your order
prior to the close of the regular trading day and reports your order to
SM&R prior to SM&R's close of business (currently 4:30 p.m. Central Time)
on the same day; or
- SM&R is advised of bank wire purchases received by Moody National Bank
before 3 p.m. Central Time.
If we receive your order after the close of the regular trading day or on any
day that the Exchange is closed, we will execute your purchase or redemption
at the price determined on the next regular trading day. In unusual
circumstances, the Funds may temporarily suspend the processing of sale
requests, or may postpone payment of proceeds for up to three business days or
longer, as allowed by federal securities laws.
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HOW TO PURCHASE SHARES
YOU SHOULD REFER TO THE FIRST PAGE OF THIS SHAREHOLDER'S GUIDE "IMPORTANT
SHAREHOLDER FACTS AND INFORMATION" FOR THE APPROPRIATE ADDRESSES AND TELEPHONE
NUMBERS.
<TABLE>
<CAPTION>
METHOD OPENING AN ACCOUNT ADDING TO AN ACCOUNT
<S> <C> <C>
BY MAIL OR THROUGH A - Determine the Fund and the Class in which you - Make your check payable to SM&R.
REGISTERED want to invest. - Use the investment slip on your confirmation, or
REPRESENTATIVE - Complete and sign the account application - Write a note specifying:
- Make the check payable to SM&R. -- Your account number
- Mail the application and your check to SM&R at -- The Fund name
the address on the first page of this guide. -- Share class
- Or deliver the information to your -- The name(s) in which the account is
representative (provided he or she has a registered.
broker-dealer arrangement with SM&R). - Mail to the address indicated on the cover page
of this guide.
- --------------------------------------------------------------------------------------------------------------------------------
BY PHONE WIRE - Call Investors Services to obtain a reference - Call Investors Services at the number on the
number (call by noon, Central Time, if you want first page of this guide, on any business day.
wired funds to be credited that day). - You can send your investment either by:
Instruct your bank to wire or transfer your -- Federal Funds Wire (offers immediate access
purchase (your bank may charge a wiring fee) to funds), or
using the information on the first page of -- Electronic transfer via ACH which avoids
this guide. wiring fees, if your bank account is set up
- Complete the account application and mail to the on file
appropriate address.
- Wires received before 3:00 p.m. Central Time on
regular trading days will receive that day's
closing price (if not, you will receive the next
trading day's closing price).
- --------------------------------------------------------------------------------------------------------------------------------
BY EXCHANGE - You can make an additional investment by exchange from an existing fund in the SM&R Mutual Funds to an
existing account by calling Investor Services.
- You can only exchange shares in the same class with identical registrations.
- There is no sales charge or redemption fee when exchanging funds within the SM&R Mutual Funds.
- Orders placed before 3 p.m. Central Time on regular trading days will receive that day's closing price
(if not, you will receive the next regular trading day's closing price).
- Exchanges are limited to three per calendar quarter, and twelve per calendar year.
- Exchanges between accounts that do not have identical ownership registration must be made in writing.
- Be sure you read the prospectus for the fund into which you are exchanging.
KEY POINT: AN EXCHANGE REPRESENTS THE SALE OF SHARES OF ONE FUND AND THE PURCHASE OF SHARES OF ANOTHER
FUND. THIS TRANSACTION MAY PRODUCE A TAXABLE GAIN OR LOSS IN A NON-TAX DEFERRED ACCOUNT.
- --------------------------------------------------------------------------------------------------------------------------------
AUTOMATIC INVESTMENT - You can transfer money automatically from your - To establish automatic investing for an existing
PLAN THROUGH THE bank account into your Fund account on a monthly account, call Investor Services for an
AUTOMATED CLEARING basis. application.
HOUSE (ACH) - Initial investment minimum is $100 if you invest - The minimum is $20.
at least $20 per month with this service.
- To enroll, check off the box on the account
application and provide:
1. Your bank account information,
2. The amount and date of your monthly
investment, and
3. A voided check.
- --------------------------------------------------------------------------------------------------------------------------------
</TABLE>
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HOW TO REDEEM SHARES
You have several convenient ways for you to redeem your shares in any of the
SM&R Mutual Funds redemptions will be at net asset value, plus any applicable
CDSC, which is determined on the date your request is received by SM&R in good
order.
<TABLE>
<CAPTION>
METHODS REQUIREMENTS
<S> <C>
CALL US - Call Investor Service during normal business hours on any business day.
- This service is only available for those accounts which are non-qualified and non-tax deferred:
1. The amount requested is $500 or more per account
2. The amount is less than $50,000 in aggregate
3. The proceeds are to be mailed to the address of record or electronically transferred to the
bank account indicated on your fund account.
4. There has been no change of address for either you or your bank for 30 days
5. Telephone services have not been declined.
6. The security procedures discussed on page 37 of this guide have been met.
7. There are no outstanding certificate shares on the account.
- All authorized requests received before 3:00 p.m. Central Time on regular trading days will be
processed at that day's closing price. Requests received after 3:00 p.m. will be processed the
following regular trading day.
- We can either:
-- wire the proceeds the next business day into your bank account of record (service charges may
apply)
-- electronically transmit the proceeds to your bank account of record via the ACH service
-- mail you a check
- All telephone calls are recorded for your protection. We are not responsible for acting on
telephone orders we believe to be genuine. (Refer to "Security Procedures")
- See exceptions below for requests that must be made in writing.
- A $10.00 fee is charged for redemptions by wire under $10,000.
- To redeem from a tax-deferred account, call Investor Services for a special withdrawal form.
- --------------------------------------------------------------------------------------------------------------------------
WRITE US - You can mail a redemption request to the appropriate address listed on the first page of this
guide.
- Your letter of instruction must:
-- list your account number and the fund name
-- indicate the number of shares or dollar value you wish to redeem
-- be signed by the registered owner(s)
-- include any outstanding share certificates issued prior to January 1, 1999
-- include special withdrawal forms for tax deferred accounts
- Refer to "Signature Guarantee" below for requests that must be signature guaranteed.
- --------------------------------------------------------------------------------------------------------------------------
FAX US You may fax your request for redemption from a non-qualified and non-tax deferred account, if your
request meets requirements stated in 2-7 under "Call Us" above. Your fax requests must be received
by SM&R before 3:00 p.m. Central Time on regular trading days to receive that day's price.
- --------------------------------------------------------------------------------------------------------------------------
SELL YOUR SHARES IN You may also redeem your shares by coming to SM&R's home office, and deliver your request in person
PERSON prior to 3:00 p.m. Central Time on regular trading days to receive that day's price.
- --------------------------------------------------------------------------------------------------------------------------
SYSTEMATIC You can withdraw money automatically from your Fund account on a monthly, quarterly, semi-annual,
WITHDRAWAL PLAN and annual basis -- without redemption fees -- on or about the 20th of the month and if:
(SWP) - Your account value is $5,000 or more
- You complete the relevant section of the application
- The withdrawal can be mailed to you at your address of record, or deposited directly to your
bank account via ACH
The minimum withdrawal is $50 per month.
To obtain proper forms, contact Investor Services.
See "Important Facts About Redeeming" for more information.
- --------------------------------------------------------------------------------------------------------------------------
</TABLE>
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PAYMENT OF REDEMPTION PROCEEDS
Under normal circumstances, shares you purchased by wire, certified check, money
order, or other immediately available funds, when redeemed, will be mailed no
later than the 7th calendar day following receipt of your redemption request.
For shares recently purchased by a personal check or ACH transfer, SM&R will
process your redemption but will generally delay sending you the proceeds for up
to ten (10) business days to allow the check or transfer to clear.
We reserve the right to redeem "in kind" by paying you the proceeds of a
redemption in securities rather than in cash.
SIGNATURE REQUIREMENTS BASED ON ACCOUNT TYPE
<TABLE>
<S> <C>
INDIVIDUAL OR JOINT TENANTS Written instructions must be signed by each
shareholder, exactly as the names appear in the
account registration.
UGMA OR UTMA Written instructions must be signed by the
custodian in his/her capacity as it appears in the
account registration until the minor reaches the
age of majority as defined by the state in which
the UGMA or UTMA was established.
SOLE PROPRIETOR, GENERAL PARTNER Written instructions must be signed by an
authorized individual in his/her capacity as it
appears on the account registration.
CORPORATION, ASSOCIATION Written instructions must be signed by the
person(s) authorized to act on the account. In
addition, a certified copy of the corporate
resolution authorizing the signer to act must
accompany the request.
TRUST Written instructions must be signed by the
trustee(s). If the name of the current trustee(s)
does not appear on the account application, a
current certificate of incumbency dated within 60
days must also be submitted.
IRA OR TSA A special withdrawal form must be signed by the
(INCLUDES ALL TYPES OF IRAS) account owner, and you may obtain this form by
contacting Investor Services at the number on the
first page of this guide. If you do not want
federal income tax withheld from your redemption,
you must state that you elect not to have such
withholding apply. In addition, your instructions
must state whether the distribution is normal
(after age 59 1/2) or premature (before age
59 1/2) and, if premature, whether any exceptions
such as death or disability apply with regard to
the 10% additional tax on early distributions.
EXECUTORS OF SHAREHOLDER ESTATES Written instructions must be signed by the
executor. A copy of the order appointing the
executor, certified within the past 12 months must
accompany the letter of instructions. A signature
guarantee must be provided as discussed below.
</TABLE>
SIGNATURE GUARANTEE
To protect you and the Funds against fraud, certain redemption requests must be
made in writing with your signature guaranteed. A signature guarantee can be
obtained at most banks and securities dealers. A notary public is not authorized
to provide a signature guarantee.
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<TABLE>
<S> <C>
The following circumstances require a signature WHO CAN PROVIDE A SIGNATURE GUARANTEE:
guarantee: - Commercial Bank
- - Redemptions from one or more of the Funds total - Trust Company
$50,000 or more - Savings Association
- - You want the proceeds sent to an address other than - Credit Union
the address currently appearing on your account - Member of Medallion Program
- - You want the proceeds sent to a bank account not - Member of a U.S. Stock Exchange
listed on your account - Authorized SM&R Representatives
- - You want the proceeds payable to anyone other than
the registered owner(s) of the account
- - Either your address or the address of your bank NOTARY PUBLIC NOT ACCEPTABLE
account has been changed within 30 days
- - The account is registered in the name of a
fiduciary, corporation or any other organization. In
these cases, additional documentation is required:
Corporate accounts: certified copy of corporate
resolution
Fiduciary accounts: copy of the power of attorney
or other governing document
- - The Funds or their transfer agent believe a
signature guarantee would protect against claims
based on transfer instructions
</TABLE>
IMPORTANT FACTS ABOUT REDEEMING
SYSTEMATIC WITHDRAWAL PLAN. It may not be advisable for shareholders to
maintain a Withdrawal Account while concurrently purchasing shares of the Fund
because of the sales charge or CDSC (as applicable) involved in additional
purchases. See "Class B Waivers of Contingent Deferred Sales Charges" for a
discussion of the CDSC waivers available. You should carefully consider such
purchases and contact your representative regarding their advisability. While
you are participating in a Systematic Withdrawal Plan dividends and capital
gains distributions will automatically be reinvested in additional shares at
net asset value. As with other redemptions, a withdrawal is a sale for federal
income tax purposes. The Systematic Withdrawal Plan will automatically
terminate if all shares are liquidated or withdrawn from the account. No
account covered by a Letter of Intent can be changed to a Systematic
Withdrawal Plan until such time as the Letter of Intent is fulfilled or
terminated, nor can an account under a Systematic Withdrawal Plan be placed
under a Letter of Intent. Retirement Plan Accounts are subject to special
withdrawal requirements. Call Investor Services for assistance.
REINVESTMENT PRIVILEGE. Within ninety (90) days of a redemption (60 days for
tax-deferred plans) of Class A or Class T shares of a Fund, a shareholder may
reinvest all or part of the proceeds in the same class of the same Fund from
which the redemption was processed at the net asset value next computed after
receipt of the proceeds to be reinvested by SM&R. THE SHAREHOLDER MUST ASK THE
TRANSFER AGENT FOR THIS PRIVILEGE AT THE TIME OF REINVESTMENT. Prior to
reinvestment of redemption proceeds, a shareholder is encouraged to consult
with his or her accountant or tax advisor to determine any possible tax
ramifications of such a transaction. Each Fund managed by SM&R may amend,
suspend, or cease offering this privilege at any time as to shares redeemed
after the date of the amendment, suspension, or cessation. For further
information about the "Systematic Withdrawal Plan" and "Reinvestment
Privilege," contact your registered representative, your broker-dealer or
SM&R.
"GOOD ORDER" means the request for redemption must include:
(1) your letter of instruction or a stock assignment specifying the fund,
account number, and number of shares or dollar amount to be redeemed.
The letter of instruction and stock powers must be signed and executed
exactly as the fund shares are registered and any outstanding share
certificates returned. It is suggested that certificates be returned by
certified mail for your protection;
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(2) any required signature guarantees (see "Signature Guarantees" above);
and
(3) other supporting legal documents, if required, in the case of estates,
trusts, guardianships, divorce, custodianships, corporations,
partnerships, pension or profit sharing plans, retirement plans and
other organizations.
Please keep in mind that it is your responsibility to ensure that all requests
are submitted to the Fund's transfer agent in good order for processing.
TEXAS OPTIONAL RETIREMENT PROGRAM. You may not redeem shares in any account
established under the Texas Optional Retirement Program, unless SM&R receives
satisfactory evidence from the state that one of the following conditions
exist:
(1) death of the employee;
(2) termination of service with the employer; or
(3) retirement of employee.
CHECK WRITING OPTION. Check writing is available in the Money Market Fund to
investors having an account value of $1,000 or more. $250 is the minimum check
amount under the check writing option. This option is not available on any
tax-deferred accounts (IRAs, TSAs, etc.). Shareholders desiring this option
must complete the check writing option signature card on the application.
After obtaining specimen signatures and the fully executed card, SM&R will
order checks and forward to you at the address of record. Investments made by
personal check or third party check will be held for fifteen (15) business
days following the investment during which time checks may not be drawn on the
amount of such investment.
When a check is presented for payment, SM&R as the shareholder's agent, will
cause each fund to redeem a sufficient number of full and fractional shares to
cover the amount of the check. Shareholders will continue to be entitled to
dividends on their shares up to the time the check is presented to SM&R for
payment. If the amount of the check is greater than the value of shares held
in the shareholder's account for more than fifteen (15) business days at the
time the check is presented for payment, the check will not be honored and
returned to the payee and the shareholder may be subject to extra charges as a
result.
Primary Fund shareholders with check writing privileges prior to December 31,
1998 will be permitted to continue writing checks on the Primary Fund subject
to the terms applicable to the Money Market Fund described above. SHAREHOLDERS
USING THE PRIMARY FUND CHECK WRITING OPTION SHOULD BE AWARE THAT WRITING A
CHECK IS A REDEMPTION OF SHARES. THOSE SHARES MAY BE WORTH LESS WHEN THE CHECK
IS PRESENTED FOR PAYMENT THAN WHEN THE CHECK WAS WRITTEN.
This service may be terminated or suspended or additional charges may be
imposed for this service. Shareholders will be provided the initial checkbook
free of charge. There will be a $5 fee for reorders. Shareholders will be
allowed to write ten (10) checks free each calendar quarter. You may be
charged $1.00 for each check written over the 10 check limit.
REDEMPTION OF SMALL ACCOUNTS. The Funds reserve the right to redeem shares in
any account (which will be promptly paid to the shareholder) if, due to your
redemptions, the value of the account falls below $500. You will be notified
that the value of your account is less than the required minimum indicated
above and allowed at least 60 days to make an additional investment to
increase the value of your account above the required minimum. The Funds may,
from time to time, change such required minimum investment.
TRANSACTIONS THROUGH PROCESSING ORGANIZATIONS:
You may also purchase or sell shares of the Funds through a broker-dealer, bank
or other financial institution, or an organization that provides recordkeeping
and consulting services to 401(k) plans or other employee benefit plans (a
"Processing Organization"). Processing Organizations may charge you a fee for
this service and may require different minimum initial and subsequent
investments than the Funds. Processing Organizations may also impose other
charges or restrictions different from those applicable to shareholders who
invest in the Funds directly. If you utilize a Processing Organization the Funds
are
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not responsible for failure of any Processing Organization to carry out its
obligations to its customers. YOU MAY NOT BE CONSIDERED THE SHAREHOLDER OF
RECORD OF YOUR SHARES. THEREFORE, YOU MAY NOT BE ABLE TO UTILIZE SERVICES
AVAILABLE ONLY TO SHAREHOLDERS OF THE FUNDS. YOU SHOULD KEEP THIS IN MIND WHEN
ESTABLISHING AN ACCOUNT IN ANY FUND.
OTHER SERVICES
In addition to the plans described under "Sales Charge Reductions and Waivers,"
that permit you to reduce the initial sales charge assessed on Class A shares or
the CDSC on Class B shares, the Funds offer other services and plans described
below. At this time, there is no charge to you for these services. The Funds may
impose fees for such services in the future. Be aware, however, that if you
elect to participate in the electronic transfers (ACH) plan described below, you
should check with your financial institution for any additional charges imposed
by them for this service. For additional information on these plans and services
you should contact your registered representative, broker-dealer or SM&R. Before
beginning any of the plans or services described below you should consult a tax
advisor.
ELECTRONIC TRANSFERS (ACH). The electronic transfer option allows you to move
money between your account(s) and your bank, savings and loan, or credit union
account using Automated Clearing House ("ACH") network. To arrange for
electronic transfers, complete the relevant Special Investor Services section
of the account application at the time you open your account and specify the
type of service or services desired. Attach a voided, pre-printed check or
deposit slip from your bank, savings and loan, or credit union account. YOUR
FINANCIAL INSTITUTION MUST BE A MEMBER OF THE AUTOMATED CLEARING HOUSE (ACH)
NETWORK FOR YOU TO TAKE ADVANTAGE OF THIS SERVICE.
TELEPHONE SERVICES. You can only use telephone services for transaction amounts
of $500 or more. Through this service, you will be able to purchase additional
shares for an existing SM&R mutual fund account by ACH. You may also use the
telephone services to redeem and exchange shares on those accounts for which
you have an executed account application on file. If you initially choose not
to have this option and wish to establish it at a later date, it would be
necessary for you to complete the required form requesting this option. For
example, we permit exchanges by telephone from a joint account only to another
joint account registered in the identical names. There may be additional
restrictions on telephone transactions by joint account owners. Contact your
registered representative for more information. PLEASE NOTE THAT THE TELEPHONE
REDEMPTION OPTION IS NOT AVAILABLE FOR QUALIFIED AND TAX-DEFERRED ACCOUNTS.
While telephone redemption is easy and convenient, this account feature involves
risk of loss from unauthorized or fraudulent transactions. SM&R will take
reasonable precautions to protect your account from fraud. You should do the
same by keeping your account information private, and by immediately reviewing
any account statements that we send to you. Make sure to contact SM&R's
Investors Services Department immediately about any transaction you believe to
be unauthorized.
SECURITY PROCEDURES
TELEPHONE TRANSACTIONS
The Funds have implemented the following security procedures intended to
protect your account from losses resulting from unauthorized or fraudulent
telephone instructions: The caller must know:
(i) the name of the fund or funds;
(ii) all digits of the account number;
(iii) the exact name and address used in the registration(s); and
(iv) the Social Security or Employer Identification Number listed on
the account(s).
Anyone with the required account information indicated above (including your
broker) can request a telephone transaction in your account. All calls are
recorded and/or monitored for verification, record keeping and
quality-assurance purposes. Requested proceeds will be forwarded only to an
address or bank account designated on the account at the time of the
transaction.
VOICE RESPONSE UNITS
The Funds now have available to shareholders a means by which they can access
account information, fund prices, and take advantage of other
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features 24-hours a day. To obtain account information you will be required to
know your fund number, account number, and your PIN number. As indicated under
"Telephone Services" above, you should keep your account information private.
We also suggest that you change your PIN number periodically and not provide
the number to anyone.
Neither the Funds nor SM&R will be responsible for the authenticity of
transaction instructions received by telephone or through the voice response
unit that comply with the current security procedures and other requirements.
SM&R believes that such security procedures and other requirements are
reasonable.
During times of economic turmoil or market volatility, severe weather, or
natural disaster you may not be able to reach SM&R by telephone to institute a
redemption or exchange.
For additional restrictions refer to "Exchange Privilege" below.
AUTOMATIC DIVIDEND INVESTMENT. Your dividends and distributions may be paid in
cash or invested in any SM&R Mutual Fund at net asset value. Unless you
specify otherwise, your dividends and distributions will automatically be
reinvested in the same SM&R Mutual Fund. You may invest your dividends and
distributions (1) into another SM&R Mutual Fund in the same class of shares;
or (2) from Class A shares into SM&R Money Market Fund, or vise versa.
You must comply with the following requirements to invest your dividends and
distributions in shares of another SM&R Mutual Fund:
(1) Your account balance (a) in the SM&R Mutual Fund paying the dividend
must be at least $5,000; and (b) the SM&R Mutual Fund receiving the
dividend must have an account balance of at least $500.
(2) Both accounts must have identical registration information, that is they
cannot be in different names; and
(3) You must have elected, in writing, to reinvest dividends into another
SM&R Mutual Fund.
AUTOMATIC INVESTMENT PLAN. Through this plan, a specified amount is
electronically transferred (via ACH) from your bank account and invested
monthly, bi-monthly, quarterly, or annually into the designated fund(s) at the
applicable offering price determined on the date of the electronic transfer.
GROUP SYSTEMATIC INVESTMENT PLAN. SM&R can establish a Group Systematic
Investment Plan with an employer having 5 or more participants under a single
payroll deduction arrangement. Under this investment plan there is a minimum
investment of $20 per individual. Any such plan may be terminated by SM&R or
the shareholder at any time upon sixty (60) days written notice. However, all
other investment amount minimums apply. Contact SM&R for further information
regarding these plans.
EXCHANGE PRIVILEGE. As an investor in the Funds, you may be permitted to
exchange shares that you own for shares of other mutual funds managed by SM&R
without the payment of an exchange fee, subject to certain conditions.
EXCHANGES BETWEEN A FUND AND ANOTHER FUND MANAGED BY SM&R ARE AVAILABLE ONLY
IN STATES WHERE THE APPLICABLE FUNDS ARE REGISTERED AND THE EXCHANGE MAY BE
LEGALLY MADE. YOU SHOULD CONTACT SM&R TO DETERMINE WHETHER A FUND IS
REGISTERED IN A PARTICULAR STATE AND WHETHER AN EXCHANGE IS PERMITTED.
WE RESERVE THE RIGHT TO TERMINATE OR CHANGE THE TERMS OF ANY EXCHANGE
PRIVILEGE AT ANY TIME.
You may exchange Class A, Class B, or Class C shares that you own in the Tax
Free and Government Bond Funds, without an exchange fee or sales charge, for
shares of the corresponding class of another fund managed by SM&R. You also
may exchange your Class A or Class B shares for shares of the Primary or Money
Market Fund, subject to two conditions:
- any applicable CDSC period has expired on the shares you wish to exchange
(I.E., 13 months in the case of Class A share purchases of $1 million or
more and 6 years in the case of Class B share purchases), and
- you meet any minimum investment requirement for the shares you wish to
acquire.
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You CANNOT exchange Class C shares for shares of the Money Market Fund or
Primary Fund.
We waive any sales charges on Class A and Class T shares acquired through an
exchange if you previously paid a sales charge on amounts invested in those
shares. For example, assume you purchase Class A shares of an Equity Income
Fund. You then exchange your Class A shares for shares of the Money Market
Fund. Later, you re-exchange those shares of the Money Market Fund for Class A
shares of the Tax Free Fund. We would not impose any sales charge upon the
re-exchange into Class A shares of the Tax Free Fund because you previously
paid a sales charge on amounts invested in those shares. In other words, we
will never impose a front-end sales charge on the same investment TWICE.
Shares of any fund managed by SM&R held in escrow under a Letter of Intent are
not eligible for the exchange privilege. Such shares will not be released from
escrow until the balance invested during the period specified in the Letter of
Intent equals or exceeds the amount required to be invested under the Letter
of Intent or the shareholder requests, in writing, that the Letter of Intent
be canceled and pays any adjustments in sales charge. After release from
escrow, shares may be exchanged, provided all other applicable conditions are
met.
You may request an exchange by telephone or in writing. In order to exchange
shares, the following requirements must be met:
(a) the exchange must be made between accounts that are registered in the
same name, address and, if applicable, taxpayer identification number;
(b) the shares of the Fund acquired through exchange must be qualified for
sale in the state in which you reside;
(c) the dollar amount of a written exchange must meet the minimum investment
requirement applicable to the shares of the fund that you would acquire
through the exchange;
(d) the minimum dollar amount of a telephone exchange is $500;
(e) SM&R must have received full payment for the shares being exchanged;
(f) your account must have been coded to reflect your certified taxpayer
identification number, or, if applicable, an appropriate Internal
Revenue Service Form W-8 (certificate of foreign status) or Form W-9
(certifying exempt status);
(g) any shares that you wish to exchange must have been held for at least
ten (10) business days; and
(h) you have received a prospectus for the fund shares you receive in the
exchange.
You may exchange shares you own in the Primary Fund for shares of the Money
Market Fund, and vise versa. You may exchange shares you own in the Primary or
Money Market Fund for Class A, T, J, or Y shares of a class of another fund
managed by SM&R, provided you meet any eligibility requirements and pay any
sales charge applicable to the acquired shares. You CANNOT exchange shares of
the Money Market Fund or Primary Fund for Class B or C shares of another fund.
The exchange privilege is not an option or right to purchase shares but is
permitted under the respective policies of the participating funds, and may be
modified or discontinued by the participating funds or by SM&R at any time.
ANY GAIN OR LOSS REALIZED ON AN EXCHANGE OR RE-EXCHANGE MAY BE RECOGNIZED FOR
FEDERAL AND STATE INCOME TAX PURPOSES. YOU SHOULD CONSULT YOUR TAX ADVISOR FOR
THE TAX TREATMENT AND EFFECT OF EXCHANGES.
AUTOMATIC CONVERSIONS. Class B shares convert automatically to the appropriate
number of Class A shares of equal dollar value after the investor has owned
the Class B shares for eight (8) years. Dividends and other distributions paid
to an investor in the form of additional Class B shares also convert to Class
A shares on a pro-rata basis. The conversion benefits shareholders because
Class A shares are subject to a lower ongoing 12b-1 fee. If an investor
exchanges Class B shares of a fund for Class B shares of another fund managed
by SM&R, the purchase date of the original investment will be used to
determine the appropriate conversion date.
41
<PAGE>
SHAREHOLDER'S GUIDE TO INVESTING WITH SM&R'S MUTUAL FUNDS
-------------------------------------------------------------------
ABUSIVE TRADING PRACTICES. Excessive, short-term (market-timing) or other
abusive trading practices may disrupt portfolio management strategies and harm
fund performance. To minimize harm to the Fund and its shareholders, we
reserve the right to reject any purchase order (including exchanges) from any
investor we believe has a history of abusive trading or whose trading, in our
judgement, has been or may be disruptive to a fund. In making this judgement,
we may consider trading done in multiple accounts under common ownership or
control.
42
<PAGE>
DISTRIBUTIONS AND TAXES
-------------------------------------------------------------------
DISTRIBUTIONS AND TAXABILITY. To avoid taxation of the Funds, the IRS Code
requires each Fund to distribute net income and any capital gains realized on
its investments annually. A Fund's income from dividends and interest and any
net realized short-term gains are paid to shareholders as ordinary income
dividends. Net realized long-term gains are paid to shareholders as capital
gains distributions.
You should verify your tax liability with your tax professional because
dividends you receive from the Funds, whether reinvested or taken as cash, are
generally considered taxable. Some dividends paid in January may be taxable as
if they had been paid the previous December. The Form 1099 that is mailed to
you every January details your dividends and their federal tax category.
DISTRIBUTION SCHEDULE. The following schedule of distributions is provided to
let you know when you can expect to receive a distribution from the SM&R
Mutual Funds you own. These distributions, under normal circumstances and if
earned, will be declared and paid in the months indicated in the following
chart.
<TABLE>
<CAPTION>
DIVIDENDS CAPITAL GAINS
<S> <C> <C>
SM&R GROWTH FUND June and December
December
- ----------------------------------------------------
SM&R EQUITY March, June, December
INCOME FUND September,
December
- ----------------------------------------------------
SM&R BALANCED March, June, December
FUND September,
December
- ----------------------------------------------------
SM&R GOVERNMENT Monthly December
BOND FUND
- ----------------------------------------------------
SM&R TAX FREE Monthly December
FUND
- ----------------------------------------------------
SM&R PRIMARY Daily paid December
FUND Monthly
- ----------------------------------------------------
SM&R MONEY Daily paid --
MARKET FUND Monthly
- ----------------------------------------------------
</TABLE>
DISTRIBUTIONS AFFECT ON NAVS. In order to be entitled to a dividend, an
investor must have acquired shares of a fund prior to the close of business on
the dustribution record date. A shareholder should be cautioned, however,
before purchasing shares of a fund immediately prior to a distribution.
Dividends and distributions paid by the Funds have the effect of reducing net
asset value per share on the record date by the amount of the payment.
Therefore, a dividend or distribution of record shortly after the purchase of
shares by a shareholder represents, in substance, a return of capital.
DIVIDEND REINVESTMENTS. Dividends and capital gains will be automatically
reinvested at net asset value in additional shares of the fund
43
<PAGE>
DISTRIBUTIONS AND TAXES
-------------------------------------------------------------------
unless SM&R is instructed otherwise in writing. Distributions not reinvested
are paid by check or transmitted to your bank account through an ACH
transaction, if elected. If the Postal Service cannot deliver your check, or
if your check remains uncashed for six months, the funds reserve the right to
reinvest your distribution check in your account at the net asset value on the
business day of the reinvestment and to reinvest all future distributions in
shares of the applicable fund(s). Dividends on capital gains declared in
December to shareholders of record in December and paid the following January
will be taxable to shareholders as if received in December. This is a
convenient way to accumulate additional shares and maintain or increase the
shareholder's earning base. Of course, any shares so acquired remain at market
risk.
Shareholders have the right to change their election with respect to the
receipt of distributions by notifying SM&R in writing, but any such change
will be effective only as to distributions for which the record date is seven
or more business day after SM&R has received the shareholder's written
request.
ALTERNATE MINIMUM TAX. If you are a shareholder of the Tax Free Fund, you
should be aware of the fact that the Tax Free Fund intends to distribute
tax-exempt dividends that shareholders may exclude from their gross income for
federal income tax purposes. However, the Tax Free Fund may invest a portion
of its assets in securities that generate income that is not exempt from
federal or state income tax. Income exempt from federal tax may be subject to
state and local income tax. Any capital gains distributed by the Tax Free Fund
may be taxable. Also, you should also keep in mind that certain income from
the Tax Free Fund may be subject to the federal alternative minimum tax.
BACKUP WITHHOLDING. Backup withholding for federal income tax may be applied,
where required by current IRS requirements, at the rate of 31% from taxable
dividends, distributions, and redemption proceeds (including exchanges) if you
fail to furnish the funds with a correct and properly certified Social
Security or Employer Identification Number when you sign your application, or
if you underreport your income to the Internal Revenue Service.
TAXABILITY OF REDEMPTIONS AND EXCHANGES. You should consult with a tax advisor
concerning the tax reporting requirements in effect on the redemption or
exchange of such shares. Any time you sell or exchange shares, it is
considered a taxable event for you. Depending on the purchase price and the
sale price of the shares you sell or exchange, you may have a gain or a loss
on the transaction. You are responsible for any tax liabilities generated by
your transactions.
RIGHTS RESERVED BY THE COMPANY. The Company, acting through its transfer agent,
reserves the right:
- to waive, lower, or raise investment minimums;
- to accept initial purchases by telephone from a registered representative;
- to refuse any purchase order;
- to cancel or rescind any purchase or exchange at any time prior to receipt
by the shareholder of written confirmation or, if later, within five (5)
business days of the transaction;
- to freeze an account and suspend account services when notice has been
received of a dispute involving the account owners or other parties or
there is reason to believe a fraudulent transaction may occur, or has
occurred;
44
<PAGE>
DISTRIBUTIONS AND TAXES
-------------------------------------------------------------------
- to restrict or refuse the use of faxed redemptions where there is a
question as to the validity of the request or proper documents have not
been received;
- to otherwise modify the conditions of purchase and any services at any
time;
- to not act on instructions believed not to be genuine; or
- to eliminate duplicate mailings of fund material to shareholders who
reside at the same address.
45
<PAGE>
APPENDIX
(DESCRIPTION OF RATINGS USED IN PROSPECTUS)
- --------------------------------------------------------------------------------
BOND RATINGS
DESCRIPTION OF STANDARD & POOR'S CORPORATION'S LONG-TERM BOND
(BONDS THAT EXTEND LONGER THAN ONE YEAR) RATING:
AAA An obligation rated "AAA" has the highest rating assigned by Standard &
Poor's. The obligor's capacity to meet its financial commitment on the
obligation is extremely strong.
AA An obligation rated "AA" differs from the highest-rated obligations only in
small degree. The obligor's capacity to meet its financial commitment on
the obligation is very strong.
A An obligation rated "A" is somewhat more susceptible to the adverse effects
of changes in circumstances and economic conditions than obligations in
higher-rated categories. However, the obligor's capacity to meet its
financial commitment on the obligation is still strong.
BBB An obligation rated "BBB" exhibits adequate protection parameters. However,
adverse economic conditions or changing circumstances are more likely to
lead to a weakened capacity of the obligor to meet its financial commitment
on the obligation.
Obligations rated "BB," "B," "CCC," "CC," and "C" are regarded as having
significant speculative characteristics. "BB" indicates the least degree of
speculation and "C" the highest. While such obligations will likely have
some quality and protective characteristics, these may be outweighed by
large uncertainties or major exposures to adverse conditions.
BB An obligation rated "BB" is less vulnerable to nonpayment than other
speculative issues. However, it faces major ongoing uncertainties or
exposure to adverse business, financial, or economic conditions, which
could lead to the obligor's inadequate capacity to meet its financial
commitment on the obligation.
B An obligation rated "B" is more vulnerable to nonpayment than obligations
rated "BB," but the obligor currently has the capacity to meet its
financial commitment on the obligation. Adverse business, financial, or
economic conditions will likely impair the obligor's capacity or
willingness to meet its financial commitment on the obligation.
DESCRIPTION OF MOODY'S INVESTOR'S SERVICE, INC.'S LONG-TERM BOND
(BONDS THAT EXTEND LONGER THAN ONE YEAR) RATINGS:
AAA Bonds which are rated "Aaa" are judged to be of the best quality. They
carry the smallest degree of investment risk and are generally referred to
as "gilt-edge." Interest payments are protected by a large or by an
exceptionally stable margin and principal is secure. While the various
protective elements are likely to change, such changes as can be visualized
are most unlikely to impair the fundamentally strong position of such
issues.
AA Bonds which are rated "Aa" are judged to be of high quality by all
standards. Together with the Aaa group, they comprise what are generally
known as high-grade bonds. They are rated lower than the
A-1
<PAGE>
APPENDIX
(DESCRIPTION OF RATINGS USED IN PROSPECTUS)
- --------------------------------------------------------------------------------
best bonds because margins of protection may not be as large as in Aaa
securities, fluctuation of protective elements may be of greater amplitude,
or there may be other elements present which make the long-term risks
appear somewhat larger than the Aaa securities.
A Bonds which are rated "A" possess many favorable investment attributes and
are to be considered as upper-medium-grade obligations. Factors giving
security to principal and interest are considered adequate, but elements
may be present which suggest a susceptibility to impairment sometime in the
future.
BAA Bonds which are rated "Baa" are considered as medium-grade obligations,
I.E., they are neither highly protected nor poorly secured. Interest
payments and principal security appear adequate for the present, but
certain protective elements may be lacking or may be characteristically
unreliable over any great length of time. Such bonds lack outstanding
investment characteristics and in fact have speculative characteristics as
well.
Ba Bonds which are rated "Ba" are judged to have speculative elements; their
future cannot be considered as well-assured. Often the protection of
interest and principal payments may be very moderate and thereby not well
safeguarded during both good and bad times over the future. Uncertainty of
position characterizes bonds in this class.
B Bonds which are rated "B" generally lack characteristics of the desirable
investment. Assurance of interest and principal payments or of maintenance
of other terms of the contract over any long period of time may be small.
DESCRIPTION OF FITCH IBCA BOND RATINGS:
AAA Highest credit quality. "AAA" ratings denote the lowest expectation of
credit risk. They are assigned only in case of exceptionally strong
capacity for timely payment of financial commitments. This capacity is
highly unlikely to be adversely affected by foreseeable events.
AA Very high credit quality. "AA" ratings denote a very low expectation of
credit risk. They indicate very strong capacity for timely payment of
financial commitments. This capacity is not significantly vulnerable to
foreseeable events.
A High credit quality. "A" ratings denote a low expectation of credit risk.
The capacity for timely payment of financial commitments is considered
strong. This capacity may, nevertheless, be more vulnerable to changes in
circumstances or in economic conditions than is the case for higher
ratings.
BBB Good credit quality. "BBB" ratings indicate that there is currently a low
expectation of credit risk. The capacity for timely payment of financial
commitments is considered adequate, but adverse changes in circumstances
and in economic conditions are more likely to impair this capacity. This is
the lowest investment-grade category.
A-2
<PAGE>
APPENDIX
(DESCRIPTION OF RATINGS USED IN PROSPECTUS)
- --------------------------------------------------------------------------------
MUNICIPAL NOTE RATINGS
DESCRIPTION OF MOODY'S INVESTOR SERVICE INC.'S SHORT-TERM MUNICIPAL NOTE
(NOTES THAT MATURE IN LESS THAN ONE YEAR) RATINGS:
MIG 1/VMIG 1 This designation denotes best quality. There is present strong
protection by established cash flows, superior liquidity support or
demonstrated broad-based access to the market for refinancing.
MIG 2/VMIG 2 This designation denotes high quality. Margins of protection are
ample although not so large as in the preceding group.
MIG 3/VMIG 3 This designation denotes favorable quality. All security elements
are accounted for but there is lacking the undeniable strength of
the preceding grades. Liquidity and cash flow protection may be
narrow and market access for refinancing is likely to be less well
established.
MIG 4/VMIG 4 This designation denotes adequate quality. Protection commonly
regarded as required of an investment security is present and
although not distinctly or predominantly speculative, there is
specific risk.
DESCRIPTION OF STANDARD AND POOR'S SHORT-TERM MUNICIPAL NOTE RATINGS:
SP-1 Strong capacity to pay principal and interest. An issue determined to
possess a very strong capacity to pay debt service is given a plus (+)
designation.
SP-2 Satisfactory capacity to pay principal and interest, with some
vulnerability to adverse financial and economic changes over the term of
the notes.
SP-3 Speculative capacity to pay principal and interest.
COMMERCIAL PAPER RATINGS
DESCRIPTION OF STANDARD & POOR'S CORPORATION'S THREE HIGHEST COMMERCIAL PAPER
RATINGS:
A-1 This designation indicates that the degree of safety regarding timely
payment is strong. Those issues determined to possess extremely strong
safety characteristics are denoted with a plus sign (+) designation.
A-2 Capacity for timely payment on issues with this designation is
satisfactory. However, the relative degree of safety is not as high as for
issues designated 'A-1'.
A-3 Issues carrying this designation have an adequate capacity for timely
payment. They are, however, more vulnerable to the adverse effects of
changes in circumstances than obligations carrying the higher designations.
A-3
<PAGE>
APPENDIX
(DESCRIPTION OF RATINGS USED IN PROSPECTUS)
- --------------------------------------------------------------------------------
DESCRIPTION OF MOODY'S INVESTORS SERVICE, INC.'S THREE HIGHEST COMMERCIAL PAPER
RATINGS:
PRIME-1 Issuers rated Prime-1 (or supporting institutions) have a superior
ability for repayment of senior short-term debt obligations. Prime-1
repayment ability will often be evidenced by many of the following
characteristics:
- Leading market positions in well-established industries.
- High rates of return on funds employed.
- Conservative capitalization structure with moderate reliance on debt
and ample asset protection.
- Broad margins in earnings coverage of fixed financial charges and high
internal cash generation.
PRIME-2 Issuers rated Prime-2 (or supporting institutions) have a strong ability
for repayment of senior short-term debt obligations. This will normally
be evidenced by many of the characteristics cited above but to a lesser
degree. Earnings trends and coverage ratios, while sound, may be more
subject to variation. Capitalization characteristics, while still
appropriate, may be more affected by external conditions. Ample
alternate liquidity is maintained.
PRIME-3 Issuers rated Prime-3 (or supporting institutions) have an acceptable
ability for repayment of senior short-term obligations. The effect of
industry characteristics and market compositions may be more pronounced.
Variability in earnings and profitability may result in changes in the
level of debt protection measurements and may require relatively high
financial leverage. Adequate alternate liquidity is maintained.
DESCRIPTION OF FITCH IBCA SHORT-TERM DEBT RATING (INCLUDING COMMERCIAL PAPER):
F1 Highest credit quality. Indicates the strongest capacity for timely payment
of financial commitments; may have an added "+" to denote any exceptionally
strong credit feature.
F2 Good credit quality. A satisfactory capacity for timely payment of
financial commitments, but the margin of safety is not as great as in the
case of the higher ratings.
F3 Fair credit quality. The capacity for timely payment of financial
commitments is adequate; however, near-term adverse changes could result in
a reduction to non-investment grade.
B Speculative. Minimal capacity for timely payment of financial commitments,
plus vulnerability to near-term adverse changes in financial and economic
conditions.
DESCRIPTION OF DUFF & PHELP'S HIGHEST COMMERCIAL RATINGS:
HIGH GRADE
D-1+ Highest certainty of timely payment. Short-term liquidity, including
internal operating factors and/or access to alternative sources of funds,
is outstanding, and safety is just below risk-free U.S. Treasury short-term
obligations.
D-1 Very high certainty of timely payment. Liquidity factors are excellent and
supported by good fundamental protection factors. Risk factors are minor.
D-1- High certainty of timely payment. Liquidity factors are strong and
supported by good fundamental protection factors. Risk factors are very
small.
A-4
<PAGE>
APPENDIX
(DESCRIPTION OF RATINGS USED IN PROSPECTUS)
- --------------------------------------------------------------------------------
GOOD GRADE
D-2 Good certainty of timely payment. Liquidity factors and company
fundamentals are sound. Although ongoing funding needs may enlarge total
financing requirements, access to capital markets is good. Risk factors are
small.
DESCRIPTION OF THOMSON BANKWATCH, INC.'S TWO HIGHEST COMMERCIAL RATINGS:
TBW-1 The highest category; indicates a very high likelihood that principal and
interest will be paid on a timely basis.
TBW-2 The second-highest category; while the degree of safety regarding timely
repayment of principal and interest is strong, the relative degree of
safety is not as high as for issues rated TBW-1.
FEDERAL FUNDS
As used in this Prospectus and in the Fund's Statement of Additional
Information, "Federal Funds" means a commercial bank's deposits in a Federal
Reserve Bank which can be transferred from one member bank's account to that of
another member bank on the same day. Federal Funds are considered to be
immediately available funds.
A-5
<PAGE>
FOR MORE INFORMATION ABOUT THE FUNDS
-------------------------------------------------------------------
The following documents contain more information about the funds and are
available free upon request:
STATEMENT OF ADDITIONAL INFORMATION (SAI).
The SAI contains additional information about all aspects of the funds. A
current SAI has been filed with the Securities and Exchange Commission and is
incorporated herein by reference.
ANNUAL AND SEMI-ANNUAL REPORTS.
The funds' annual and semi-annual reports provide additional information about
the funds' investments. The annual report contains a discussion of the market
conditions and investment strategies that significantly affected each fund's
performance during the last fiscal year.
REQUESTING DOCUMENTS.
You may request a free copy of the SAI and these reports, make shareholder
inquiries, or request further information about the funds either by contacting
your broker or by contacting the funds at:
SECURITIES MANAGEMENT AND RESEARCH, INC.
P.O. BOX 58969
HOUSTON, TEXAS 77258-8969
TELEPHONE:1-800-231-4639 (TOLL FREE) OR
281-334-2469 (COLLECT)
PUBLIC INFORMATION.
You can review and copy information about the funds, including the SAI, at the
Securities and Exchange Commission's Public Reference Room in Washington D.C.
You may obtain information on the operation of the public reference room by
calling the Commission at 1-800-SEC-0330. Reports and other information about
the Funds also are available on the Commission's Internet site at
http://www.sec.gov. You may obtain copies of this information, upon payment of a
duplicating fee, by writing the Public Reference Section of the Securities and
Exchange Commission, Washington, D.C. 20549-6009.
SM&R GOVERNMENT BOND FUND
SM&R TAX FREE FUND
SM&R PRIMARY FUND
SM&R MONEY MARKET FUND
Investment Company
File No. 811-6477
<PAGE>
STATEMENT OF ADDITIONAL INFORMATION
December 31, 1999
SM&R INVESTMENTS, INC.
CLASSES A, B, C, T, Y, AND J
SM&R GOVERNMENT BOND FUND
SM&R TAX FREE FUND
SINGLE CLASS FUNDS
SM&R PRIMARY FUND
SM&R MONEY MARKET FUND
Mailing Address: P.O. Box 58969
Houston, Texas 77258-8969
Street Address: 2450 South Shore Boulevard
League City, Texas 77573
This Statement is NOT a prospectus, but should be read in conjunction with
the funds' current prospectus or prospectuses dated December 31, 1999 that is
relevant to the class or classes of shares you own or wish to purchase (each
such prospectus is referred to herein as a "Prospectus" and collectively as the
"Prospectuses"). To obtain a Prospectus contact your registered representative,
broker-dealer, financial intermediary, or Securities Management and Research,
Inc. ("SM&R"), at the address noted above, or by calling:
Investor Services
Telephone Number: (281) 334-2469
Toll Free 1-(800) 231-4639
No dealer, sales representative, or other person has been authorized to give
any information or to make any representations other than those contained in
this Statement of Additional Information (and/or the Prospectuses referred to
above), and if given or made, such information or representations must not be
relied upon as having been authorized by the Company or SM&R. No Prospectus or
Statement of Additional Information constitutes an offer or solicitation by
anyone in any state in which such offer or solicitation is not authorized, or in
which the person making such offer or solicitation is not qualified to do so, or
to any person to whom it is unlawful to make such offer or solicitation.
Terms not defined herein have the same meaning as given to them in the
Prospectuses.
<PAGE>
TABLE OF CONTENTS
<TABLE>
<S> <C>
THE COMPANY......................................................................... 1
INVESTMENT OBJECTIVES AND POLICIES.................................................. 2
PORTFOLIO TURNOVER.................................................................. 19
MANAGEMENT OF THE COMPANY........................................................... 20
REMUNERATION OF DIRECTORS........................................................... 23
POLICY REGARDING PERSONAL INVESTING................................................. 24
PERSONAL INVESTING BY OTHER SM&R OFFICERS AND EMPLOYEES............................. 24
CONTROL PERSONS AND PRINCIPAL HOLDERS OF SECURITIES................................. 25
CONTROL AND MANAGEMENT OF SM&R...................................................... 25
INVESTMENT ADVISORY AGREEMENT....................................................... 26
ADMINISTRATIVE SERVICE AGREEMENT.................................................... 28
PORTFOLIO TRANSACTIONS AND BROKERAGE ALLOCATION..................................... 30
DESCRIPTION OF FUND SHARES.......................................................... 31
PURCHASE, REDEMPTION, AND PRICING OF SHARES......................................... 33
DETERMINATION OF NET ASSET VALUE................................................ 33
DETERMINATION OF OFFERING PRICE................................................. 35
REDUCTION AND/OR WAIVER OF INITIAL SALES CHARGES (CLASS A AND CLASS T SHARES)... 38
REDUCTION AND/OR WAIVER OF CONTINGENT DEFERRED SALES CHARGES (CLASS B SHARES)... 40
FUND AND CLASS EXPENSES......................................................... 41
SHAREHOLDER SERVICING AND DISTRIBUTION PLAN......................................... 42
SPECIAL PURCHASE PLANS.............................................................. 44
REDEMPTION.......................................................................... 47
TAXES............................................................................... 48
SYSTEMATIC WITHDRAWAL PLAN.......................................................... 51
THE UNDERWRITER..................................................................... 52
CUSTODIAN........................................................................... 54
TRANSFER AGENT AND DIVIDEND PAYING AGENT............................................ 54
COUNSEL............................................................................. 54
AUDITORS AND FINANCIAL STATEMENTS................................................... 54
PERFORMANCE AND ADVERTISING DATA.................................................... 55
PERFORMANCE MEASURES................................................................ 59
</TABLE>
ii
<PAGE>
THE COMPANY
SM&R Investments, Inc. (the "Company") was incorporated under the laws of
Maryland on November 6, 1991. The Company changed its name from SM&R Capital
Funds, Inc. to SM&R Investments, Inc. on December 31, 1998.
The Company is registered under the Investment Company Act of 1940, as
amended (the "1940 Act") as a diversified, open-end management investment
company, commonly called a "mutual fund." This registration does not imply any
supervision by the Securities and Exchange Commission (the "Commission") over
the Company's management or its investment policies or practices. It currently
offers the following funds:
- SM&R GOVERNMENT BOND FUND ("Government Bond Fund");
- SM&R TAX FREE FUND (the "Tax Free Fund");
- SM&R PRIMARY FUND (the "Primary Fund"); and
- SM&R MONEY MARKET FUND (the "Money Market Fund").
The Government Bond Fund and the Tax Free Fund (the "Multi-Class Funds") are
each divided into six classes of shares (the "Classes") of common stock
designated as:
- Class T (existing shareholders and certain designated persons);
- Class A (front-end load)
- Class B (back-end load)
- Class C (level load)
- Class J
- Class Y (institutional shareholders)
These classes of shares have different sales charges and distribution and
service (12b-1) fee structures. A Multiple Class Plan was adopted for the
Multi-Class Funds pursuant to Rule 18f-3. The Primary Fund and Money Market Fund
do not have separate classes (that is, each is a "Single-Class Fund").
1
<PAGE>
INVESTMENT OBJECTIVES AND POLICIES
As noted in the Prospectuses under "Investment Objectives and Policies,"
each Fund has its own investment objective and follows policies and techniques
designed to achieve those objectives.
FUNDAMENTAL INVESTMENT RESTRICTIONS
Each Fund's investment objective and the following fundamental investment
limitations can not be changed in any material way without the approval of a
majority of the Fund's shares. For these purposes, a "majority" means the lesser
of (i) 67% or more of the voting securities present at a meeting if the holders
of more than 50% of voting securities are represented at that meeting or (ii)
more than 50% of the outstanding voting securities of the Fund.
DIVERSIFICATION. With respect to 75% of the Fund's total assets, may not
purchase securities of an issuer (other than cash or cash items, or securities
of the U.S. Government, its agencies, or instrumentalities or of other
investment companies), if (i) such purchase would cause more than 5% of the
Fund's total assets taken at market value to be invested in the securities of
such issuer, or (ii) such purchase would at the time result in more than 10% of
the outstanding voting securities of such issuer being held by the Fund.
INDUSTRY CONCENTRATION. A Fund may not invest 25% or more of its total
assets in the securities of one or more issuers conducting their principal
business activities in the same industry (excluding the U.S. Government or any
of its agencies or instrumentalities).
BORROWING. A Fund may not borrow money, except (a) the Fund may borrow from
banks (as defined in the Act) or through reverse repurchase agreements in
amounts up to 33 1/3% of its total assets (including the amount borrowed), (b)
the Fund may, to the extent permitted by applicable law, borrow up to an
additional 5% of its total assets for temporary purposes, (c) the Fund may
obtain such short-term credits as may be necessary for the clearance of
purchases and sales of portfolio securities, (d) the Fund may purchase
securities on margin to the extent permitted by applicable law, and (e) the Fund
may engage in transactions in mortgage dollar rolls which are accounted for as
financings.
LOANS. A Fund may not make loans, except through (a) the purchase of debt
obligations in accordance with the Fund's investment objective and policies, (b)
repurchase agreements with banks, brokers, dealers, and other financial
institutions, and (c) loans of securities as permitted by applicable law.
UNDERWRITING. A Fund may not underwrite securities issued by others, except
to the extent that the sale of portfolio securities by the Fund may be deemed to
be an underwriting.
2
<PAGE>
REAL ESTATE. A Fund may not purchase, hold or deal in real estate, although
the Fund may purchase and sell securities that are secured by real estate or
interests therein, securities of real estate investment trusts, and
mortgage-related securities and may hold and sell real estate acquired by the
Fund as a result of the ownership of securities.
COMMODITIES. A Fund may not invest in commodities or commodity contracts,
except that the Fund may invest in currency and financial instruments and
contracts that are commodities or commodity contracts.
SENIOR SECURITIES. A Fund may not issue senior securities to the extent
such issuance would violate applicable law.
The above mentioned investment limitations are considered at the time
investment securities are purchased.
NON-FUNDAMENTAL INVESTMENT POLICIES
The Board of Directors of the Company (the "Board") has adopted the
following non-fundamental investment policies. Non-fundamental investment
policies may be adopted or changed by the Board of Directors, without approval
from shareholders.
Each Fund will not:
1. Issue senior securities.
2. Engage in the strategy of short sales of securities.
3. Purchase securities on margin (but it may obtain such short-term
credits as may be necessary for the clearance of purchases and sales of
securities).
4. Acquire, lease or hold real estate except such as may be necessary or
advisable for the maintenance of its offices.
5. Write or purchase from others, put and call options, or any combination
thereof.
6. Purchase or sell commodities or commodity contracts including futures
contracts.
7. Invest in companies for the purpose of exercising control or
management.
8. Invest in oil, gas or other mineral exploration or development
programs. However, any Fund may invest in securities which are secured
by real estate or real estate mortgages; securities of issuers which
invest or deal in real estate mortgages and securities of issuers which
invest in or sponsor oil, gas, or other mineral exploration, provided
such securities meet the criterion set forth under "Investment
Objectives and Policies" in the Prospectuses.
9. Act as underwriter of securities issued by other persons except insofar
as the Fund may be technically deemed an underwriter under the federal
securities laws in connection with the disposition of portfolio
securities.
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10. Borrow money, except for such action by the Fund for temporary or
emergency purposes in an amount not to exceed 10% of the Fund's net
assets.
11. Lend any funds or other assets, except that the Government Bond Fund
may from time to time lend the securities it holds to qualified
broker-dealers or other institutional investors. Such loans shall not
exceed ten percent (10%) of the Government Bond Fund's net assets at
the time of the most recent loan and shall be made pursuant to written
agreements and shall be continuously secured by collateral in the form
of cash, U.S. Government obligations, or irrevocable standby letters of
credit in an amount equal to at least 102% of the market value at all
times of the loaned securities plus the accrued interest and dividends.
During the time securities are on loan, the Government Bond Fund will
continue to receive the interest and dividends, or amounts equivalent
thereto, on the loaned securities while receiving a fee from the
borrower or earning interest on the investment of the cash collateral.
The right to terminate the loan will be given to either party subject
to appropriate notice. Upon termination of the loan, the borrower will
return to the lender securities identical to the loaned securities. The
Government Bond Fund will not have the right to vote securities on
loan, but would terminate the loan and retain the right to vote if that
were considered important with respect to the investment.
12. Pledge or mortgage any of its assets, except for such action by the
Fund for temporary or emergency purposes in an amount not to exceed 10%
of the Fund's net assets.
13. Invest more than 5% of the value of the net assets of the Fund, at time
of purchase in the securities of any one issuer, but this limitation
does not apply to investments in securities issued or guaranteed by the
U.S. government or its instrumentalities.
14. Purchase any security (other than United States Government obligations)
if, as a result, the Fund would hold more than (a) 10% of the total
value of any class of outstanding securities of an issuer or (b) 10% of
the outstanding voting securities of an issuer.
15. Concentrate more than 25% of the net assets of the Fund in any one
industry or group of industries; provided however, there is no
limitation with respect to investments in obligations issued or
guaranteed by the United States Government or its agencies or
instrumentalities. For purposes of this restriction, telephone, gas and
electric public utilities are each regarded as separate industries.
16. Purchase any securities issued by a corporation which has not been in
continuous operation for three years, but such period may include the
operation of a predecessor.
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17. Purchase or retain securities of any issuer if any officer or director
of the Company or of its investment manager own individually more than
one-half of one percent ( 1/2 of 1%) of the securities of that issuer,
and collectively the officers and directors of the Company and
investment manager together own more than 5% of the securities of that
issuer.
18. Purchase securities of other investment companies except pursuant to a
plan of merger, consolidation or acquisition of assets approved by the
Company's shareholders.
19. Invest in foreign securities, except that this policy does not apply to
the Government Bond Fund.
20. Purchase warrants.
21. Purchase any security which is an "illiquid security" if more than 15%
(10% for the Money Market Fund) of the net assets of the Fund taken at
market value would be invested in such securities.
If a percentage restriction on investment or utilization of assets as set
forth is adhered to at the time an investment is made, a later change in the
percentage resulting from a change in the value or cost of a Fund's assets will
not be considered a violation of the restriction except as provided in 17 above.
INVESTMENT TECHNIQUES
LENDING PORTFOLIO SECURITIES. Consistent with applicable regulatory
requirements, the Government Bond Fund may lend its portfolio securities to
broker-dealers and other financial institutions, to a maximum of 10% of the
value of its net assets at the time of the most recent loan. Such loans must be
callable at any time and continuously secured by cash collateral equal at all
times to at least 102% of the market value of the securities loaned, including
accrued interest.
The market value of the securities loaned shall be monitored daily, and the
borrower must increase the collateral whenever the market value of the
securities loaned rises above the level of the collateral. Cash collateral shall
be invested in short-term instruments that are sufficiently liquid to provide
for repayment upon demand (such as bank letters of credit, U.S. Government
Obligations, or other cash equivalents). Cash or instruments collateralizing the
Fund's loans of securities will be segregated and maintained at all times with
SM&R, the Fund's custodian, in an amount at least equal to the current market
value of the loaned securities. The Government Bond Fund will receive amounts
equal to earned income for having made the loan.
The Government Bond Fund will be the beneficial owner of the loaned
securities in that any gain or loss in the market price during the loan inures
to the Government Bond Fund and its shareholders. Thus, when a loan is
terminated, the value of the securities may be more or less than their value at
the beginning of the loan. In determining whether to lend its portfolio
securities to a broker-dealer or other financial institution,
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the Government Bond Fund will take into account the creditworthiness of such
borrower and will monitor such creditworthiness on an ongoing basis inasmuch as
default by the other party may cause delays or other collection difficulties.
The Government Bond Fund may pay placing brokers' fees in connection with loans
of its portfolio securities.
In lending its portfolio securities, the Government Bond Fund is subject to
the risk that the borrower may become insolvent on a day on which the loaned
security is rapidly advancing in price. In that event, the borrower may fail to
return the loaned securities while the cash collateral is insufficient to
purchase the full amount of the security loaned, and the borrower would be
unable to furnish additional collateral. The borrower would be liable for any
shortage; but the Government Bond Fund would be an unsecured creditor with
respect to such shortage and might not be able to recover any of it. However,
this risk may be minimized by a careful selection of borrowers and securities to
be lent and by monitoring collateral.
The Government Bond Fund will not lend securities to broker-dealers
affiliated with SM&R. This restriction will not affect the ability of the Fund
to maximize its securities lending opportunities.
U.S. TREASURY SECURITIES. Each Fund may invest in U.S. Treasury securities,
including bills, notes and bonds issued by the U.S. Treasury. These instruments
are direct obligations of the U.S. Government and, as such, are backed by the
full faith and credit of the United States. They differ primarily in their
interest rates, the lengths of their maturities and the dates of their
issuances.
U.S. GOVERNMENT OBLIGATIONS. Each Fund may invest in direct or implied
obligations of the U.S. Government, its agencies or instrumentalities ("U.S.
Government Obligations"). These U.S. Government Obligations, including those
that are guaranteed by federal agencies or instrumentalities, may or may not be
backed by the full faith and credit of the United States. Obligations of the
Government National Mortgage Association ("GNMA" or "Ginnie Mae"), the Farmers
Home Administration and the Export-Import Bank are backed by the full faith and
credit of the United States. Securities that are not backed by the full faith
and credit of the United States include, among others, obligations issued by the
Tennessee Valley Authority, the Resolution Trust Corporation, the Federal
National Mortgage Association ("FNMA" or "Fannie Mae"), the Federal Home Loan
Mortgage Corporation ("FHLMC" or "Freddie Mac") and the United States Postal
Service, each of which has the right to borrow from the United States Treasury
to meet its obligations. In addition, obligations of the Federal Farm Credit
Bank and the Federal Home Loan Bank may be satisfied only by the individual
credit of the issuing agency. Investments in Freddie Mac, and Fannie Mae and
other obligations may include collateralized mortgage obligations ("CMOs") and
real estate mortgage investment conduits issued or guaranteed by such entities.
In the case of U.S. Government Obligations not backed by the full faith and
credit of the United States, the Company must look principally to the agency
issuing or guaranteeing the obligation for ultimate repayment and may not be
able to assert a claim
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against the U.S. if the agency or instrumentality does not meet its commitments.
There is no guarantee that the U.S. Government will support securities not
backed by its full faith and credit. Accordingly, although these securities have
historically involved little risk of loss of principal if held to maturity, they
may involve more risk than securities backed by the U.S. Government's full faith
and credit.
MORTGAGE-BACKED U.S. GOVERNMENT OBLIGATIONS. The Government Bond Fund may
invest in mortgage-backed securities issued or guaranteed by U.S. Government
agencies such as GNMA, FNMA or FHLMC and representing undivided ownership
interests in pools of mortgages. The mortgages backing these securities may
include conventional 30-year fixed rate mortgages, 15-year fixed rate mortgages,
graduated payment mortgages and adjustable rate mortgages.
The U.S. Government or the issuing agency guarantees the payment of the
interest on and principal of these securities. However, the guarantees do not
extend to the securities' yield or value, which are likely to vary inversely
with fluctuations in interest rates, nor do the guarantees extend to the yield
or value of the Government Bond Fund's shares. These securities are in most
cases "pass-through" instruments, through which the holders receive a share of
all interest and principal payments from the mortgages underlying the
securities, net of certain fees. Because the principal amounts of such
underlying mortgages may generally be prepaid in whole or in part by the
mortgagees at any time without penalty and the prepayment characteristics of the
underlying mortgages vary, it is not possible to predict accurately the average
life of a particular issue of pass-through securities. Mortgage-backed
securities are subject to more rapid repayment than their stated maturity date
would indicate as a result of the pass-through of prepayments on the underlying
mortgage obligations. The remaining maturity of a mortgage-backed security will
be deemed to be equal to the average maturity of the mortgages underlying such
security determined by SM&R on the basis of assumed prepayment rates with
respect to such mortgages. The remaining expected average life of a pool of
mortgages underlying a mortgage-backed security is a prediction of when the
mortgages will be repaid and is based upon a variety of factors such as the
demographic and geographic characteristics of the borrowers and the mortgaged
properties, the length of time that each of the mortgages has been outstanding,
the interest rates payable on the mortgages and the current interest rate
environment. While the timing of prepayments of graduated payment mortgages
differs somewhat from that of conventional mortgages, the prepayment experience
of graduated payment mortgages is basically the same as that of the conventional
mortgages of the same maturity dates over the life of the pool. During periods
of declining interest rates, prepayment of mortgages underlying mortgage-backed
securities can be expected to accelerate. When the mortgage obligations are
prepaid, the Government Bond Fund reinvests the prepaid amounts in other income
producing securities, the yields of which reflect interest rates prevailing at
the time. Therefore, the Government Bond Fund's ability to maintain a portfolio
of high-yielding mortgage-backed securities will be adversely affected to the
extent that prepayments of mortgages must be reinvested in securities which have
lower yields than the prepaid
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mortgage-backed securities. Moreover, prepayments of mortgages which underlie
securities purchased by the Government Bond Fund at a premium would result in
capital losses.
INFLATION-INDEXED BONDS. The Government Bond Fund may invest in inflation-
indexed bonds, which are fixed income securities whose principal value is
periodically adjusted according to the rate of inflation. The interest rate on
these bonds is generally fixed at issuance at a rate lower than typical bonds.
Over the life of an inflation-indexed bond, however, interest will be paid based
on a principal value that is adjusted for inflation. Inflation-indexed
securities issued by the U.S. Treasury will initially have maturities of five or
ten years, although it is anticipated that securities with other maturities will
be issued in the future. The securities will pay interest on a semi-annual
basis, equal to a fixed percentage of the inflation-adjusted principal amount.
If the periodic adjustment rate measuring inflation fails, the principal
value of inflation falls, the principal value of inflation-indexed bonds will be
adjusted downward, and consequently the interest payable on these securities
(calculated with respect to a smaller principal amount) will be reduced.
Repayment of the original bond principal upon maturity (as adjusted for
inflation) is guaranteed in the case of U.S. Treasury inflation-indexed bonds,
even during a period of deflation. However, the current market value of the
bonds is not guaranteed and will fluctuate.
The U.S. Treasury has only recently begun issuing inflation-indexed bonds.
As such, there is no trading history of these securities, and there can be no
assurance that a liquid market in these instruments will develop, although one
is expected. Lack of a liquid market may impose the risk of higher transaction
costs and the possibility the fund may be forced to liquidate positions when it
would not be advantageous to do so.
Any increase in the principal amount of an inflation-indexed bond will be
considered taxable ordinary income, even though investors do not receive their
principal until maturity.
COLLATERALIZED OBLIGATIONS. The Government Bond Fund and the Money Market
Fund each may invest a portion of its assets in collateralized mortgage
obligations or "CMOs" issued or guaranteed by a U.S. Government agency or
instrumentality, such as the FHLMC. A CMO is a debt security issued by a
corporation, trust or custodian, or by a U.S. Government agency or
instrumentality, that is collateralized by a portfolio or pool of mortgages,
mortgage-backed securities or U.S. Government Obligations. The issuer's
obligation to make interest and principal payments is secured by the underlying
pool or portfolio of securities. A variety of types of collateralized
obligations are available currently and others may become available in the
future.
The Government Bond Fund and the Money Market Fund will not invest in any
CMOs that are not fully collateralized obligations. "Fully collateralized" means
that the collateral will generate cash flows sufficient to meet obligations to
holders of the collateralized obligations under even the most conservative
prepayment and interest rate projections. Thus, the collateralized obligations
are structured to anticipate a worst case
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prepayment condition and to minimize the reinvestment rate risk for cash flows
between coupon dates for the collateralized obligations. A worst case prepayment
condition generally assumes immediate prepayment of all securities purchased at
a premium and zero prepayment of all securities purchased at a discount.
Reinvestment rate risk may be minimized by assuming very conservative
reinvestment rates and by other means such as by maintaining the flexibility to
increase principal distributions in a low interest rate environment. The
requirements as to collateralization are determined by the issuer or sponsor of
the collateralized obligation in order to satisfy the U.S. Government agency or
instrumentality guaranteeing the obligation.
Collateralized obligations are designed to be retired as the underlying
securities are repaid. In the event of prepayment on or call of such securities,
the class of collateralized obligations first to mature generally will be paid
down first. Therefore, although in most cases the issuer of collateralized
obligations will not supply additional collateral in the event of such
prepayment, there will be sufficient collateral to secure collateralized
obligations that remain outstanding.
The Government Bond Fund may also invest in securities issued by private
issuers that represent an interest in or are secured by mortgage-backed
securities issued or guaranteed by the U.S. government or one of its agencies or
instrumentalities. In addition, the Government Bond Fund may invest in
securities issued by private issuers that represent an interest in or are
secured by mortgage loans or mortgage-backed securities without a government
guarantee but usually have some form of private credit enhancement.
MORTGAGE PASS-THROUGH SECURITIES. Additionally, the Government Bond Fund
may invest in mortgage pass-through securities that do not contain government
guarantees. Commercial banks, savings and loan institutions, private mortgage
insurance companies, mortgage bankers and other secondary market issuers also
create pass-through pools of conventional residential mortgage loans. Such
issuers may, in addition, be the originators and/or servicers of the underlying
mortgage loans as well as the guarantors of the mortgage-related securities.
Pools created by such non-governmental issuers generally offer a higher rate of
interest than government and government-related pools because there are no
direct or indirect government or agency guarantees of payments in the former
pools. However, timely payment of interest and principal of these pools may be
supported by various forms of insurance or guarantees, including individual
loan, title, pool and hazard insurance and letters of credit. The insurance and
guarantees are issued by governmental entities, private insurers and the
entities creating the mortgage pools. Such insurance and guarantees, and the
creditworthiness of the issuers thereof, will be considered in determining
whether a mortgage-related security meets the Government Bond Fund's investment
quality standards. There can be no assurance that the private insurers or
guarantors can meet their obligations under the insurance policies or guarantee
arrangements.
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OTHER ASSET-BACKED SECURITIES. It is expected that new types of
asset-backed securities (unrelated to mortgage loans) may be available for
investment in the future and may be purchased by the funds that may invest in
mortgage-related securities. Several types of asset-backed securities have
already been offered to investors, such as home equity loan receivables.
Traditional home equity loans (HELs) are very similar to residential mortgages
which pass through principal payments (or amortize) over a time period.
Generally these securities have maturities of 10 to 20 years, which is modestly
shorter than a traditional 30-year first mortgage. Although some HELs evidence a
first lien on the underlying property, usually a first mortgage is in place
concurrently with a HEL. Another asset-backed security is a home equity line of
credit (HELOC), which is a line of credit extended to a property owner that can
be drawn upon, and paid down and then re-drawn upon until the line's final
maturity. This revolving feature results in HELOC cash flows looking very
similar to credit card cash flows. As with other pass-through securities, an
investor's return may be affected by early prepayment of principal on the
underlying loan.
Consistent with the Government Bond Fund's investment objectives and
policies, the portfolio manager may invest in other types of asset-backed
securities.
MUNICIPAL SECURITIES. The Tax Free Fund intends under normal market
conditions to invest at least 80% of its net assets in municipal securities.
As used in the Prospectuses and this Statement of Additional Information,
the term "municipal securities" means obligations including municipal bonds and
notes and tax exempt commercial paper issued by or on behalf of states,
territories and possessions of the United States, the District of Columbia and
their political subdivisions, agencies and instrumentalities, the interest from
which is, in the opinion of counsel to the issuers of such securities, exempt
from federal income tax. To the extent that an investment in municipal
securities does not run counter to any of the investment policies of the Tax
Free Fund or any of the investment restrictions to which the Tax Free Fund is
subject, the Fund may invest in any combination of the various types of
municipal securities described below which, in the judgment of SM&R, will
contribute to the attainment of the Fund's investment objective. Such
combination of municipal securities may vary from time to time. Discussed below
are the major attributes of the various municipal and other securities in which
the Tax Free Fund may invest.
Municipal Bonds, which meet longer term capital needs and generally have
maturities of more than one year when issued, have two principal
classifications: general obligation bonds and revenue bonds.
GENERAL OBLIGATION BONDS -- Issuers of general obligation bonds include
states, counties, cities, towns and regional districts. The proceeds of these
obligations are used to fund a wide range of public projects, including
construction or improvement of schools, highways and roads and water and sewer
systems. The basic security behind general obligation bonds is the issuer's
pledge of its full faith and credit and taxing power
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for the payment of principal and interest. The taxes that can be levied for the
payment of debt service may be limited or unlimited as to the rate or amount of
special assessments.
REVENUE BONDS -- The principal security for a revenue bond is generally the
net revenues derived from a particular facility, group of facilities, or, in
some cases, the proceeds of a special excise or other specific revenue source.
Revenue bonds are issued to finance a wide variety of capital projects
including: electric, gas, water and sewer systems; highways, bridges, and
tunnels; port and airport facilities; colleges and universities; and hospitals.
Although the principal security behind these bonds may vary, many provide
additional security in the form of a debt service reserve fund whose money may
be used to make principal and interest payments on the issuer's obligations.
Housing finance authorities have a wide range of security, including partially
or fully insured mortgages, rent subsidized and/or collateralized mortgages,
and/or the net revenues from housing or other public projects. Some authorities
provide further security in the form of a state's ability (without obligation)
to make up deficiencies in the debt service reserve fund.
Industrial Development Bonds are, in most cases, revenue bonds and are
issued for or on behalf of public authorities to raise money to finance various
privately operated facilities for business and manufacturing, housing, sports
and pollution control. These bonds are also used to finance public facilities
such as airports, mass transit systems, ports and parking. The payment of the
principal and interest on such bonds is dependent solely on the ability of the
facilities user to meet its financial obligations and the pledge, if any, of
real and personal property so financed as security for such payment. The Tax
Free Fund will purchase Industrial Revenue Development Bonds only to the extent
the interest paid is tax-exempt pursuant to the Tax Reform Act of 1986, which
limited the types of facilities that may be financed with tax-exempt industrial
development and private activity bonds.
Municipal notes generally are used to provide for short-term working capital
needs and generally have maturities of one year or less. Municipal notes
include:
TAX ANTICIPATION NOTES ("TANS") -- TANS are issued to finance working
capital needs of municipalities and are issued in anticipation of various
seasonal tax revenue, such as income, sales, use and business taxes, and are
payable from these specific future taxes.
REVENUE ANTICIPATION NOTES ("RANS") -- RANS are in expectation of receipt of
other types of revenue, such as federal revenues available under federal revenue
sharing programs.
BOND ANTICIPATION NOTES ("BANS") -- BANS are issued to provide interim
financing until long-term financing can be arranged. In most cases, the
long-term bonds then provide the money for the repayment of the notes.
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CONSTRUCTION LOAN NOTES -- Construction Loan Notes are sold to provide
construction financing. After successful completion and acceptance, many
projects receive permanent financing through the Federal Housing Administration
under "Fannie Mae" (the Federal National Mortgage Association) or "Ginnie Mae"
(the Government National Mortgage Association).
TAX-EXEMPT COMMERCIAL PAPER (SHORT-TERM DISCOUNT NOTES) -- Tax Exempt
Commercial Paper is a short-term obligation with a stated maturity of 365 days
or less. It is issued by state and local governments or their agencies to
finance seasonal working capital needs or as short-term financing in
anticipation of longer-term financing.
Variable or Floating Rate Demand Notes ("VRDNs") are tax-exempt obligations
which contain a floating or variable interest rate adjustment formula and an
unconditional right of demand to receive payment of the unpaid principal balance
plus accrued interest upon a short notice period (generally up to 30 days) prior
to specified dates, either from the issuer or by drawing on a bank letter of
credit, a guarantee or insurance issued with respect to such instrument. The
interest rates are adjustable at intervals ranging from daily to up to six
months to some prevailing market rate for similar investments, such adjustment
formula being calculated to maintain the market value of the VRDN at
approximately the par value of the VRDN upon the adjustment date. The
adjustments are typically based upon the prime rate of a bank or some other
appropriate interest rate adjustment index. The Tax Free Fund will decide which
variable or floating rate demand instruments it will purchase in accordance with
procedures prescribed by the Board to minimize credit risks. Any VRDN must be of
high quality as determined by SM&R and subject to review by the Board with
respect to both its long-term and short-term aspects, except where credit
support for the instrument is provided even in the event of default on the
underlying security, the Fund may rely only on the high quality character of the
short-term aspect of the demand instrument.
Defeased bonds or escrow secured bonds are created when an issuer refunds in
advance of maturity (or pre-refunds) an outstanding bond issue which is not
immediately callable, and it becomes necessary or desirable to set aside funds
for redemption of the bonds at a future date. In an advance refunding, the
issuer will use the proceeds of a new bond issue to purchase high grade,
interest bearing debt securities which are then deposited in an irrevocable
escrow account held by a trustee bank to secure all future payments of principal
and interest of the advance refunded bond. Escrow secured bonds will often
receive a triple A rating from Moody's and S&P. The Tax Free Fund will purchase
escrow secured bonds without additional insurance only when the escrow is
invested in U.S. government securities backed by the full faith and credit of
the U.S. government.
Insured bonds are secured by the issuer's revenues and also are backed by
insurance policies written by commercial insurance companies. Issuers of
municipal bonds enter into a contractual agreement with an insurance company to
pay the bondholder any principal and interest that is due on a stated maturity
date which has not been paid by the issuer. Once issued, this default insurance
usually extends for the term of the issue
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and cannot be canceled by the insurance company. The bondholder who has not
received payments for principal or interest on the stated due dates for the
insured bond must notify the insurance company and surrender any unpaid bonds
and coupons for payment of the face amount of the insured principal and
interest. The commercial insurance companies represent some of the largest and
financially strongest insurance companies in the United States.
Although insured municipal bonds sell at yields lower than they would
without the insurance, they tend to have yields higher than Aaa/AAA-rated
noninsured municipal bonds.
In addition, other types of municipal securities similar to the above
described municipal bonds and municipal notes are, or may become available. For
the purpose of the Company's investment restrictions set forth in this Statement
of Additional Information, the identification of the "issuer" of a municipal
security which is not a general obligation bond is made by the adviser on the
basis of the characteristics of the obligation, the most significant of which is
the source of funds for the payment of principal and interest on such security.
RISKS RELATING TO MUNICIPAL SECURITIES. There can be no assurance that the
Tax Free Fund will achieve its investment objective. Yields on municipal
securities are dependent on a variety of factors, including the general
conditions of the money market and the municipal bond market, the size of a
particular offering, the maturity of the obligations and the rating of the
issue. Municipal securities with longer maturities tend to produce higher yields
and are generally subject to potentially greater capital appreciation and
depreciation than obligations with shorter maturities. The market prices of
municipal securities usually vary, depending upon available yields. An increase
in interest rates will generally reduce the value of portfolio investments, and
a decline in interest rates will generally increase the value of portfolio
investments. The ability of the Fund to achieve its investment objective is also
dependent on the continuing ability of the issuers of municipal securities in
which the Fund invests to meet their obligations for the payment of interest and
principal when due. The ratings of Moody's, Standard & Poor's, and Fitch
represent their opinions as to the quality of municipal securities which they
undertake to rate. Ratings are not absolute standards of quality; consequently,
municipal securities with the same maturity, coupon and rating may have
different yields. There are variations in municipal securities, both within a
particular classification and between classifications, depending on numerous
factors. It should also be pointed out that, unlike other types of investments,
municipal securities have traditionally not been subject to regulation by, or
registration with, the Securities and Exchange Commission, although there have
been proposals which would provide for such regulation in the future.
The federal bankruptcy statutes relating to the debts of political
subdivisions and authorities of states of the United States provide that, in
certain circumstances, such subdivisions or authorities may be authorized to
initiate bankruptcy proceedings without prior notice to or consent of creditors,
which proceedings could result in material and adverse changes in the rights of
holders of their obligations.
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Lawsuits challenging the validity under state constitutions of present
systems of financing public education have been initiated or adjusted in a
number of states, and legislation has been introduced to effect changes in
public school financing in some states. In other instances there have been
lawsuits challenging the issuance of pollution control revenue bonds or the
validity of their issuance under state or federal law which could ultimately
affect the validity of those municipal securities or the tax-free nature of the
interest thereon.
In addition, Congress could enact tax legislation such as a flat tax rate
that would make tax-free bonds less desirable to investors seeking ways to
reduce taxable income. If that were to occur, it could cause the value of the
securities to drop.
TAXABLE SECURITIES. Each Fund, except the Tax Free Fund, invests primarily
in securities the income from which (either in the form of dividends or
interest) is taxable as ordinary income. Under normal market conditions, the Tax
Free Fund may invest up to 20% of its net assets in taxable securities, and may
invest a greater percentage of its net assets in taxable securities under
extraordinary circumstances as a temporary defensive measure.
Interest earned on investments in taxable securities may be taxable to
shareholders as ordinary income. Investors should be aware that investments in
taxable securities by the Tax Free Fund are restricted to:
U.S. Government Obligations, which consist of obligations issued or
guaranteed by the U.S. Government, its agencies, authorities or
instrumentalities. Some of these securities are supported by the full faith
and credit of the U.S. Government; others are supported by the right of the
issuer to borrow from the U.S. Treasury; and the remainder are supported
only by the credit of the instrumentality.
Corporate Debt Securities which at the date of the investment are rated A or
higher by Moody's, Standard & Poor's, or Fitch.
Commercial Paper which at the date of the investment is rated P-2 or higher
by Moody's or A-2 or higher by S&P or, if not rated, is issued by a company
which at the date of the investment has an outstanding debt issue rated A or
higher by Moody's and Standard & Poor's.
Bank Obligations, which include certificates of deposit, bankers'
acceptances, and other short-term obligations of U.S. banks which at the
date of the investment have a capital, surplus and undivided profits of $1
billion as of the date of their most recently published financial statements
(See "Certificate of Deposits" below).
REPURCHASE AGREEMENTS. Each Fund may enter into "repurchase agreements"
with banks or with government securities dealers, recognized by the Federal
Reserve Board and which have been approved by the Board. Under a repurchase
agreement, the Fund will acquire and hold a security (government security,
certificate of deposit, or banker's acceptance) subject to the seller's
agreement to repurchase the securities at a predetermined price within a
specified time (normally one day to one week), thereby determining
14
<PAGE>
the yield during the Fund's holding period. During the holding period, the
seller must provide additional collateral if the market value of the obligation
falls below the repurchase price. In these transactions, the securities
purchased shall have an initial total value in excess of the value of the
repurchase agreement.
The custodian for a Fund purchasing such repurchase agreement will hold the
securities underlying such repurchase agreement or such securities may be part
of the Federal Reserve Book Entry System. If the seller defaults or becomes
insolvent, the Fund could realize delays, costs or a loss in asserting its
rights to, or in liquidating, the collateral in satisfaction of the seller's
repurchase agreement. The Funds will enter into repurchase agreements only with
sellers who are believed to present minimal credit risks and will monitor the
value of the collateral during the holding period. Credit risks are evaluated
pursuant to guidelines adopted and regularly reviewed by the Board which set
forth credit worthiness standards for the banks and registered government
security dealers with whom the Funds may enter into such repurchase agreements.
Such arrangements permit each Fund to keep all of its assets at work while
retaining flexibility in pursuit of investments of a longer-term nature. No Fund
will purchase repurchase agreements maturing more than seven (7) days after such
purchase.
RATINGS. If the rating of a security purchased by a Fund is subsequently
reduced below the minimum rating required for purchase or a security purchased
by the Fund ceases to be rated, neither event will require the sale of the
security. However, the adviser will consider any such event in determining
whether the Fund should continue to hold the security. Any security held by the
Tax Free Fund which is subsequently downgraded below BBB by S&P or Baa by
Moody's will be sold as soon as it is advantageous to do so after the downgrade.
WHEN-ISSUED AND DELAYED DELIVERY TRANSACTIONS. The Government Bond Fund and
Tax Free Fund each may purchase and sell portfolio securities on a "when issued"
and "delayed delivery" basis. The price of such securities is fixed at the time
the commitment to purchase is made, but delivery and payment for such securities
take place at a later date. Normally, the settlement date occurs within one
month of the purchase. During the period between purchase and settlement,
generally no payment is made by the Fund to the issuer and no interest accrues
to the Fund. These transactions are subject to market fluctuations; the value of
the securities at delivery may be more or less than their purchase price, and
yields generally available on comparable securities when delivery occurs may be
higher than yields on the securities obtained pursuant to such transactions.
Because the Government Bond Fund and Tax Free Fund each relies on the buyer
or seller, as the case may be, to consummate the transactions, failure by the
other party to complete a transaction may result in the Fund missing the
opportunity of obtaining a price or yield considered to be advantageous. When
the Government Bond Fund or Tax Free Fund is the buyer in such transactions,
however, it will maintain, in a segregated account with its custodian, cash,
short-term money market instruments, high quality debt
15
<PAGE>
securities or portfolio securities having an aggregate value equal to the amount
of such purchase commitments until payment is made. The Government Bond Fund or
Tax Free Fund will make commitments to purchase securities on such basis only
with the intention of actually acquiring these securities, but it may sell such
securities prior to the settlement date if such sale is considered to be
advisable. No specific limitation exists as to the percentage of the Government
Bond Fund's or Tax Free Fund's assets which may be used to acquire securities on
a "when issued" or "delayed delivery" basis. To the extent either Fund engages
in "when issued" and "delayed delivery" transactions, it will do so for the
purpose of acquiring securities for its portfolio consistent with its investment
objective and policies and not for the purpose of investment leverage.
FOREIGN DEBT SECURITIES. The Government Bond Fund may invest up to 5% of
its assets in debt obligations of foreign corporations or financial
institutions, such as Yankee Bonds and Eurodollar Bonds. Yankee Bonds are U.S.
dollar-denominated obligations of foreign issuers that are issued in the United
States. Eurodollar Bonds are U.S. dollar-denominated obligations of U.S. or
foreign issuers that are traded outside the U.S., primarily in Europe.
Yankee Bonds involve certain risks associated with investing in a foreign
issuer. Such risks may include nationalization of the issuer, confiscatory
taxation by the foreign government, establishment of controls by the foreign
government that would inhibit the remittance of amounts due the Fund, lack of
comparable publicly-available information concerning foreign issuers, lack of
comparable accounting and auditing practices in foreign countries and difficulty
in enforcing claims against foreign issuers in the event of default. Eurodollar
Bonds are subject to the same risks as domestic issues, in particular, credit
risk, market risk and liquidity risk. Eurodollar Bonds also are subject to
sovereign risk, including the risk that a foreign government might prevent
dollar-denominated funds from leaving the country. Eurodollar Bonds that are
issued by foreign issuers are subject to the same risks as Yankee Bonds.
ILLIQUID SECURITIES. Each Fund may invest up to 15% (10% for the Money
Market Fund) of its net assets in illiquid securities, including domestic or
foreign securities not listed on domestic or foreign exchanges and repurchase
agreements maturing in excess of seven days. Non-publicly traded securities may
be less liquid than publicly traded securities. Although these securities may be
resold in privately negotiated transactions, the prices realized from these
sales could be less than those originally paid by a Fund. In addition, companies
whose securities are not publicly traded are not subject to the disclosure and
other investor protection requirements that may be applicable if their
securities were publicly traded. A Fund's investments in illiquid securities are
subject to the risk that should the Fund desire to sell any of these securities
when a ready buyer is not available at a price that the Investment Manager deems
representative of their value, the value of the Fund's net assets could be
adversely affected.
144A SECURITIES AND SECTION 4(2) COMMERCIAL PAPER. If otherwise consistent
with its investment objective and policies, a Fund may purchase securities that
are not registered
16
<PAGE>
under the Securities Act of 1933, as amended (the "1933 Act") but which can be
sold to "qualified institutional buyers" in accordance with Rule 144A under the
1933 Act, or which were issued under Section 4(2) of the 1933 Act. Due to
changing markets or other factors, 144A securities may be subject to a greater
possibility of becoming illiquid than securities which have been registered with
the SEC for sale.
Any such security may be determined to be LIQUID under procedures adopted by
the Board. These procedures consider trading activity, availability of reliable
price information, and other relevant information to determine whether an
adequate trading market exists for that security. To the extent that, for a
period of time, qualified institutional or other buyers may cease purchasing
such restricted securities, the level of illiquidity of a Fund holding such
securities may increase.
CERTAIN INVESTMENT GRADE OBLIGATIONS. Although obligations rated BBB by S&P
or Baa by Moody's are considered investment grade, they may be viewed as being
subject to greater risks than other investment grade obligations. Obligations
rated BBB by S&P are regarded as having only an adequate capacity to pay
principal and interest and those rated Baa by Moody's are considered
medium-grade obligations that lack outstanding investment characteristics and
have speculative characteristics as well.
CERTIFICATE OF DEPOSITS AND BANKERS ACCEPTANCES. A certificate of deposit
generally is a short-term, interest-bearing negotiable certificate issued by a
commercial bank or savings and loan association against funds deposited in the
issuing institution. The interest rate may be fixed for the stated term or may
be periodically adjusted prior to the instrument's stated maturity, based upon a
specified market rate. A bankers' acceptance is a time draft drawn on a
commercial bank by a borrower, usually in connection with an international
commercial transaction to finance the import, export, transfer or storage of
goods. The borrower is liable for payment, as is the bank, which unconditionally
guarantees to pay the draft at its face amount on the maturity date. Most
bankers' acceptances have maturities of six months or less and are traded in
secondary markets prior to maturity.
Savings and loan associations whose certificates of deposit may be purchased
by the Funds are subject to regulation and examination by the Office of Thrift
Supervision. Such certificates of deposit held by a Fund do not benefit
materially from insurance from the Federal Deposit Insurance Corporation.
The Money Market Fund may not invest in any certificate of deposit or
bankers' acceptance of a commercial bank unless: the bank is organized and
operating in the United States, has total assets of at least $1 billion and is a
member of the Federal Deposit Insurance Corporation; or the bank is a foreign
branch of a United States bank or a United States branch of a foreign bank which
bank has $1 billion of total assets.
FOREIGN RISK FACTORS. Obligations of foreign branches of U.S. banks are
subject to somewhat different risks than those of domestic banks. These risks
include foreign economic and political developments, foreign governmental
restrictions which may
17
<PAGE>
adversely affect payment of principal and interest on the obligations, foreign
withholding and other taxes on interest income, and difficulties in obtaining
and enforcing a judgment against a foreign branch of a domestic bank. In
addition, different risks may result from the fact that foreign branches of U.S.
banks and U.S. branches of foreign banks are not necessarily subject to the same
or similar regulatory requirements that apply to domestic banks. For instance,
such branches may not be subject to the types of requirements imposed on
domestic banks with respect to mandatory reserves, loan limitations,
examinations, accounting, auditing, record keeping and the public availability
of information. Such obligations are not traded on any national securities
exchange. While the Primary Fund does not presently invest in obligations of
foreign branches of United States banks, it may do so in the future. Investments
in such obligations will not be made in excess of 10% of the Primary Fund's
total assets and will be made only when SM&R believes the risks described above
are minimal.
MONEY MARKET FUND INVESTMENTS. Pursuant to the 1940 Act, the Money Market
Fund may invest only in United States dollar-denominated instruments that
present minimal credit risks, have a remaining maturity of 397 calendar days or
less, and which are at the time of acquisition "eligible securities" as defined
in Rule 2a-7 under the 1940 Act. Generally, an eligible security is:
- A security with a remaining maturity of 397 calendar days or less
("Short-term") that has received a rating from two nationally recognized
statistical rating organizations ("NRSROs"), or if rated by only one
NRSRO, from that NRSRO, in one of the two highest rating categories
("Acceptable Rating") for debt obligations; or
- A security with a remaining maturity of 397 calendar days or less issued
by an issuer that has received an Acceptable Rating from at least two
NRSROs, or if rated by only one NRSRO, from that NRSRO, with respect to a
class of debt obligations (or any debt obligation within that class) that
is comparable in priority and security with the security (a "Comparable
Security").
If a security is acquired based on the rating of only one NRSRO, such
acquisition must be ratified by the Board. While Rule 2a-7 permits money market
funds to invest in certain unrated securities of comparable quality to eligible
rated securities, the Money Market Fund currently does not intend to invest in
unrated securities.
SM&R has the responsibility of determining that each investment by the Money
Market Fund presents minimal credit risks. SM&R's determination of minimal
credit risk will be based on an analysis of the issuer's (and, if applicable,
any guarantor's) capacity to repay its Short-term debt obligations. The analysis
cannot rely on ratings alone, but must be made on factors pertaining to credit
quality in addition to any rating that the security or the issuer may have been
assigned. The extensiveness of the evaluation may vary with the type and
maturity of the instrument involved and the SM&R's familiarity with the issuer.
The Money Market Fund will maintain a dollar-weighted average portfolio
maturity appropriate to its objective of maintaining a stable net asset value
per share, provided,
18
<PAGE>
however, that the Fund will not (1) purchase any instrument with a remaining
maturity at the date of acquisition of greater than 397 calendar days, or (2)
maintain a dollar-weighted average portfolio Maturity that exceeds 90 days. The
"maturity" of a portfolio instrument is the period remaining (calculated from
the trade date or such other date on which the Fund's interest in the security
is subject to market action) until the date on which, in accordance with the
terms of the security, the principal amount must unconditionally be paid, or in
the case of a security called for redemption, the date on which the redemption
must be made.
The Money Market Fund will maintain a diversified portfolio in accordance
with the provisions of Rule 2a-7. In meeting diversification requirements of the
Rule, SM&R classifies securities into First and Second Tier Securities, as
defined in the 1940 Act. A "First Tier Security" is an Eligible Security that
(1) has been rated by at least two NRSROs (or if rated by only one NRSRO, by
that NRSRO) in the highest rating category for Short-term debt obligations; (2)
has been issued by an issuer that is rated with respect to a Comparable
Security, by at least two NRSROs (or if rated by only one NRSRO, by that NRSRO)
in the highest rating category for Short-term debt obligations; (3) has been
issued by a registered investment company that is a money market fund; or (4) is
a "Government Security," as defined in Section 2(a)(16) of the 1940 Act. A
"Second Tier Security" is an Eligible Security that is not a First Tier
Security.
Immediately after the acquisition of any security (other than a Government
Security), SM&R shall confirm that the Fund has not invested more than 5% of its
total assets in securities issued by any one issuer; provided, however, that the
Fund may invest up to 25% of its total assets in the First Tier Securities of a
single issuer for a period of up to three (3) business days after the purchase;
provided, further, that the Fund may not make more than one investment in
accordance with the foregoing provision at any time. Immediately after the
acquisition of a Second Tier Security, SM&R shall confirm that the Fund has not
invested more than (1) the greater of 1% of its total assets or one million
dollars in securities issued by that issuer that are Second Tier Securities, and
(2) 5% of its total assets in securities which, when acquired were, or have
become, Second Tier Securities.
PORTFOLIO TURNOVER
Portfolio turnover is calculated by dividing the lesser of annual purchases
or sales of portfolio securities by the monthly average of the value of a Fund's
portfolio securities, excluding securities whose maturities at the time of
purchase are one (1) year or less. It is intended that portfolio changes in the
Government Bond Fund and Tax Free Fund be made as infrequently as possible,
consistent with market and economic factors generally, and special
considerations affecting any particular security such as the limitation of loss
or realization of price appreciation at a time believed to be opportune.
19
<PAGE>
The portfolio turnover rates for the Funds for past three fiscal years are
as follows:
<TABLE>
<CAPTION>
YEAR ENDED YEAR ENDED YEAR ENDED
AUGUST 31, 1997 AUGUST 31, 1998 AUGUST 31, 1999
----------------- ----------------- -----------------
<S> <C> <C> <C>
Government Bond Fund....................... 9.06% 32.71% %
Tax Free Fund.............................. 22.15% 12.77% %
Primary Fund............................... 0% 0% %
Money Market Fund.......................... N/A N/A %
</TABLE>
The Primary Fund experienced no portfolio turnover as the majority of securities
owned during the period had maturities of one year or less at the time of
acquisition.
A high rate of portfolio turnover involves corresponding greater expenses
than a lower rate. A Fund and its shareholders must bear such higher expenses.
High portfolio turnover also may result in the realization of substantial net
short-term capital gains.
A significant increase in bond yields early in calendar year 1996 provided
an opportunity to restructure the Government Bond Fund. Bonds with high coupons
and short maturities and calls were sold with the proceeds invested in bonds
with similar coupons and longer maturities. Another opportunity to restructure
occurred in mid-calendar year 1998, when investors appeared to strongly prefer
Treasury securities over all other fixed income securities. Agency and Treasury
securities with lower yields and shorter maturities were sold and the proceeds
were invested in agency and corporate issues with higher yields and longer
maturities.
MANAGEMENT OF THE COMPANY
The Board of Directors has the responsibility for the overall management of
the Company, including general supervision and review of its investment
activities. The directors, in turn, elect the officers of the Company who are
responsible for administering day-to-day operations of the Company.
Information about each of the officers and directors of the Company is set
forth below. Unless otherwise indicated, the address of an officer or director
is 2450 South Shore Boulevard, Suite 400, League City, Texas 77573. Directors
who are deemed to be "interested persons" of the Company, as defined in the 1940
Act, are indicated by an asterisk(*).
20
<PAGE>
<TABLE>
<CAPTION>
POSITIONS HELD PRINCIPAL OCCUPATIONS
NAME, ADDRESS, AND AGE WITH THE COMPANY DURING PAST 5 YEARS
- -------------------------------- ------------------------- -----------------------------------------------------
<S> <C> <C>
Ernest S. Barratt, Ph.D.(1) Director Marie B. Gale Centennial Professor in Psychiatry
Age 74 Professor and Chief, Psychodiagnostic Service and
Department of Psychiatry and Cognitive Neuroscopic Laboratory, Department of
Behavioral Sciences, Psychiatry and Behavioral Sciences, University of
University of Texas Medical Texas Medical Branch, a medical school and hospital
Branch, system, 1981 to present; Director of American
Galveston, Texas 77550-2777 National Investment Accounts, Inc. ("Investment
Accounts"), another investment company advised by
SM&R, 1990 to present.
Michael W. McCroskey* Director and President President, Chief Executive Officer, Director and
Age 56 member of the Executive Committee of SM&R, June 1994
to present; President and Director of the Company,
June 1994 to present; President and Director of SM&R
Growth Fund, Inc., SM&R Equity Income Fund, Inc., and
SM&R Balanced Fund, Inc. (the "SM&R Equity Funds"),
each an investment company advised by SM&R, June 1994
to present; President and Director of Investment
Accounts, June 1994 to present; Executive Vice
President, American National, 1971 to present; Vice
President of Standard Life and Accident Insurance
Company, 1988 to present; Assistant Secretary of
American National Life Insurance Company of Texas,
1986 to present, Vice President, Investments of
American National Property and Casualty Company, 1994
to present; Vice President, Pacific Property and
Casualty, 1996 to present, life, health and accident
insurance companies in the American National Family
of Companies; Vice President, Garden State Life
Insurance Company, 1994 to present; President and
Director, ANREM Corporation, 1977 to present;
President and Director of ANTAC Corporation, 1995 to
present; Director, Comprehensive Investment Services,
Inc. since 1997.
Allan W. Matthews*(1)(2) Director Program Officer, The Moody Foundation (a charitable
Age 34 foundation), April 1991 to present; Director of
7114 Youpon Investments Accounts, 1997 to present.
Galveston, Texas 77551
Lea McLeod Matthews*(2) Director Texas State Board of Education, 1999 to present;
Age 37 Publications Editor, National Western Life Insurance
#8 Kern Ramble Co., 1990 to 1999; Associate in Customer Service
Austin, Texas 78722 Designation; Director of Investment Accounts, 1994 to
present; Director of Garden State Life Insurance
Company, 1993 to present; Director of Kids Exchange
of Austin (a non-profit corporation), 1996 to
present; Consultant to Austin Writers League.
</TABLE>
21
<PAGE>
<TABLE>
<CAPTION>
POSITIONS HELD PRINCIPAL OCCUPATIONS
NAME, ADDRESS, AND AGE WITH THE COMPANY DURING PAST 5 YEARS
- -------------------------------- ------------------------- -----------------------------------------------------
<S> <C> <C>
Ann McLeod Moody*(2) Director Director of Moody Gardens, Inc., 1994 to present;
Age 62 Director of Bank of Galveston, National Association,
5 Colony Park Drive 1989 to present; Director of The Westcap Corporation,
Galveston, Texas 77551 1990 to present; Director of Seal Fleet, Inc., 1972
to 1996; Director of Investments Accounts, 1997 to
present.
Edwin K. Nolan(1) Director Investor and Attorney, Law Offices, Edwin K. Nolan,
Age 56 P. C., Canyon Lake, Texas, 1977 to present;
1271 Jonas Drive Director/Owner, Canyon Lake Aviation, Inc. (Aviation
Canyon Lake, Texas 78133 Service), Canyon Lake, Texas, 1986 to present;
Director/Owner, Canyon Lake Airport, Inc. (Airport),
Canyon Lake, Texas, 1985 to 1995; Director, Hancock
Mini Mart, Inc., 1995 to present; Director of
Investments Accounts, 1997 to present.
Robert V. Shattuck, Jr. Director Attorney, Law Offices of Robert V. Shattuck, Jr.,
Age 58 Galveston, Texas, 1986 to present; Director of
1013 23rd Street Investments Accounts, 1997 to present.
Galveston, Texas 77550
Jamie G. Williams Director Academic Language Therapist and Educational
Age 53 Consultant, 1974 to present; Director of The Learning
3328 Stanford Therapist Graduate Certificate Program, 1986 to 1995;
Dallas, Texas 75225 Adult Assessment Clinic and Adolescent Academic
Development Programs, Division of Evening, Summer and
Continuing Studies, Southern Methodist University,
1994 to 1995; Adjunct Instructor in Department of
Psychology, Dedman College, Southern Methodist
University, 1988 to 1995; Director of Investments
Accounts, 1997 to present.
Frank P. Williamson Director Retired Owner of Professional Pharmacy, 1964 to 199 ;
Age 67 Director of Investments Accounts, 1997 to present.
301 Barracuda
Galveston, Texas 77550
Emerson V. Unger, C.L.U. Vice President Vice President of SM&R and the SM&R Equity Funds
Age 53 since 1983; and Vice President of the Investment
Accounts since 1991.
Brenda T. Koelemay - Vice Vice President and Vice President and Treasurer of SM&R, the SM&R Equity
President and Treasurer Treasurer Funds, and Investment Accounts since 1992; Treasurer
Age 45 of Comprehensive Investment Services, Inc. since
1997; Senior Manager, KPMG Peat Marwick LLP, July
1980 to April 1992.
Teresa E. Axelson Vice President and Vice President and Secretary of SM&R and the SM&R
Age 52 Secretary Equity Funds since 1983; Vice President and Secretary
of the Investment Accounts since 1991.
</TABLE>
22
<PAGE>
<TABLE>
<CAPTION>
POSITIONS HELD PRINCIPAL OCCUPATIONS
NAME, ADDRESS, AND AGE WITH THE COMPANY DURING PAST 5 YEARS
- -------------------------------- ------------------------- -----------------------------------------------------
<S> <C> <C>
Terry E. Frank Vice President and Vice President and Portfolio Manager of the
Age 44 Portfolio Manager Government Bond Fund, Tax Free Fund, Primary Fund and
Money Market Fund and member of the Fixed Income
Investment Committee of SM&R since 1991; Former
research analyst, Equitable Investment Services, Des
Moines, Iowa; Former securities analyst, Gibraltar
Savings Association, Houston, Texas; Former Senior
Money Market Trader, American Capital Asset
Management, Houston, Texas.
</TABLE>
- ------------------------
* "Interested persons" as defined by the 1940 Act.
(1) Member of the Company's audit committee.
(2) Mr. Matthews and Ms. Matthews are children of Mrs. Ann McLeod Moody.
REMUNERATION OF DIRECTORS
Each director is reimbursed for expenses incurred in connection with each
meeting of the Board of Directors or any Committee meeting attended. Each
director receives a fee, allocated among the Funds, which consists of an annual
retainer component and a meeting fee component.
Set forth below is information regarding compensation paid or accrued during
the fiscal year ended August 31, 1999 for each director of the Company.
<TABLE>
<CAPTION>
PENSION OR
RETIREMENT TOTAL
BENEFITS ESTIMATED COMPENSATION
AGGREGATE ACCRUED AS ANNUAL FROM ALL FUNDS
COMPENSATION PART OF FUND BENEFITS UPON MANAGED BY
DIRECTOR FROM COMPANY EXPENSES RETIREMENT SM&R
- ------------------------------- -------------- ------------ ------------- --------------
<S> <C> <C> <C> <C>
Ernest S. Barratt, Ph.D........ $ None None $
Allan W. Matthews.............. $ None None $
Lea McLeod Matthews............ $ None None $
Michael W. McCroskey........... $ None None $
Ann McLeod Moody............... $ None None $
Edwin K. Nolan................. $ None None $
Robert V. Shattuck, Jr......... $ None None $
Jamie G. Williams.............. $ None None $
Frank P. Williamson............ $ None None $
</TABLE>
Directors of the Company who are affiliated with SM&R receive no
compensation for attendance at Board or committee meetings. No officer receives
compensation from the Company. Officers and directors of the Company affiliated
with SM&R may, however, receive indirect compensation from the Company to the
extent the Company pays underwriting commissions and investment advisory and
service fees to SM&R. During the year ended August 31, 1999, the Company paid or
accrued approximately $ to directors for fees and expenses in attending
meetings of the Board.
23
<PAGE>
Directors, officers, full-time employees, and other affiliated persons of
the Company, SM&R, or American National may purchase Class T shares of the
Government Bond and Tax Free Funds at net asset value per share without the
imposition of any sales charge. (For more information, see "Eligible Purchasers
of Class T Shares" and "Sales Charge Reductions and Waivers" in the Prospectus
for Class T shares.) The difference between the price at which these shares are
sold to public and the price at which these shares are sold to directors and
affiliated persons arises because SM&R does not pay commissions on sales of
shares to these types of purchasers.
POLICY REGARDING PERSONAL INVESTING
The following policies have been made a part of the Company's Code of
Ethics.
A portfolio manager must use extreme care to avoid even the appearance of a
conflict of interest in trading in any personal account (or an account in which
he has a beneficial interest). Accordingly, a portfolio manager may not trade in
(or otherwise acquire) any security for his personal account if that same
security is held in, or is being considered as a potential acquisition by, any
of the Funds. Any beneficial interest in a security held by a portfolio manager
must be sold at least 24 hours prior to any investment by the Funds. The
following exceptions apply:
(1) Any beneficial interest in a security owned at the time of employment
may be held or traded at any time other than within 24 hours of a
trade in the Funds for the same or related security. Dividends in that
security may be re-invested in accordance with a formal plan offered
by the issuer;
(2) Any beneficial interest in a security acquired by devise or bequeath
may be held or traded at any time other than within 24 hours of a
trade in the Funds for the same or related security;
(3) Any beneficial interest in a security issued by the Government or any
Agency of the United States, a State, or any political subdivision
thereof may be traded or held; and
(4) Any beneficial interest in a security for which a written approval is
first obtained from the President & CEO may be traded or held.
Furthermore, portfolio managers are prohibited from acquiring any security
of an initial public offering and must receive prior written approval from
SM&R's Chief Executive Officer before investing in any private placement
securities.
PERSONAL INVESTING BY OTHER SM&R OFFICERS AND EMPLOYEES
Officers and employees of the Company other than portfolio managers may
trade in (or otherwise acquire) or hold any security for his own account (or an
account in which he has beneficial interest). However, the trade must not occur
within 24 hours of a trade in the Funds for the same or related security.
24
<PAGE>
CONTROL PERSONS AND PRINCIPAL HOLDERS OF SECURITIES
As of December 1, 1999, the officers and directors of the Company as a group
owned less than 1% the outstanding shares of the Company and of each Fund. As of
December 1, 1999, SM&R and its parent, American National Insurance Company
("American National"), a Texas life insurance company with its principal offices
at One Moody Plaza, Galveston, Texas 77550, owned the following:
<TABLE>
<CAPTION>
% OF % OF % OF
OUTSTANDING % OF % OF OUTSTANDING OUTSTANDING
SHARES OF THE OUTSTANDING OUTSTANDING SHARES OF THE SHARES OF THE
GOVERNMENT SHARES OF THE SHARES OF THE MONEY MARKET COMPANY (AS A
BOND FUND TAX FREE FUND PRIMARY FUND FUND WHOLE)
------------- ------------- ------------- ------------- -------------
<S> <C> <C> <C> <C> <C>
American National..... 29.58% 59.89% 65.41% None 63.16%
SM&R.................. 21.15% 11.81% 1.58% 100% 3.00%
</TABLE>
Any person who owns directly or indirectly more than 25% of the outstanding
voting securities of the Company or a fund is presumed by the Investment Company
Act of 1940 to "control" the Company or the fund, and may be able to
significantly influence the outcome of any shareholder vote. For purposes of
voting on matters submitted to shareholders, any person who owns more than 50%
of the outstanding shares of the Company or a fund generally would be able to
cast the deciding vote. By virtue of their stock ownership, SM&R and American
National control the Company's operations, including the ability to make changes
in the fundamental investment objectives and restrictions of each fund of the
Company, as well as the ability to increase investment advisory fees,
notwithstanding other shareholders' votes to the contrary.
CONTROL AND MANAGEMENT OF SM&R
SM&R has been the investment adviser, manager and underwriter of the Company
since the Company began business in 1992. SM&R acts pursuant to a written
agreement periodically approved by the directors or shareholders of the Company.
SM&R is also the investment adviser and underwriter of the SM&R Equity Funds and
Investment Accounts. SM&R's address is that of the Company.
SM&R is a wholly-owned subsidiary of American National, a Texas life
insurance company with its principal offices in Galveston, Texas. As of December
1, 1999, the Moody Foundation (the "Foundation"), a charitable foundation
established for charitable and educational purposes, owned approximately 23.7%
of American National's common stock and the Libbie S. Moody Trust, a private
trust, owned approximately 37.6% of such shares. The trustees of the Moody
Foundation are Robert L. Moody ("RLM"), Chairman of the Board of Directors of
American National, Frances Moody Newman and Ross R. Moody. SM&R was incorporated
in 1964 and has managed investment companies since 1966. SM&R also is investment
adviser to the SM&R Equity Funds, which are three other registered investment
companies, Investment Accounts, which is an investment company used to fund
benefits under contracts issued by American National and for The Moody National
Bank of Galveston (the "Bank"), a
25
<PAGE>
national bank. SM&R does and may, from time to time, serve as investment adviser
to other clients including employee benefit plans, other investment companies,
banks, foundations and endowment funds.
The Bank is trustee of the Libbie S. Moody Trust. RLM is Chairman of the
Board and President, Chief Executive Officer of the Bank, President and Director
of Moody Bancshares, Inc. ("Bancshares"), the sole shareholder of Moody Bank
Holding Company, Inc. ("MBHC"), and President and Director of MBHC, the Bank's
controlling shareholder. As of December 1, 1999, the Three R Trusts, trusts
established by RLM for the benefit of his children, owned 100% of Bancshares'
Class B stock (which elects a majority of Bancshares' and MBHC's directors) and
47.5% of its Class A Stock. The trustee of the Three R Trusts is Irwin M. Herz,
Jr., who is also a director of American National and a partner in Greer, Herz &
Adams, L.L.P., 18th Floor, One Moody Plaza, Galveston, Texas, General Counsel to
American National, the Bank, Bancshares, MBHC, the Company, the other American
National Funds, Investment Accounts and SM&R.
The following persons are affiliated with the Company and SM&R in the
specified capacities:
- Michael W. McCroskey, President and Director of the Company, is also
President, Chief Executive Officer, Director and a member of the Executive
Committee of SM&R, and President and Director of the SM&R Equity Funds and
Investment Accounts;
- Emerson V. Unger, Vice President of the Company, is also Vice President of
SM&R and Vice President of the SM&R Equity Funds and Investment Accounts;
- Teresa E. Axelson, Vice President, Secretary of the Company, is also Vice
President and Secretary of SM&R, Investment Accounts, and the SM&R Equity
Funds;
- Brenda T. Koelemay, Vice President and Treasurer of the Company, is also
Vice President and Treasurer of SM&R, the Investment Accounts and the SM&R
Equity Funds;
- Terry E. Frank is Vice President and Portfolio Manager of the Government
Bond Fund, Tax Free Fund, Primary Fund and Money Market Fund and a member
of the Fixed Income Investment Committee.
INVESTMENT ADVISORY AGREEMENT
Under Investment Advisory Agreements (each, an "Advisory Agreement") between
the Company and SM&R dated February 19, 1992 for the Government Bond Fund and
Primary Fund, July 1, 1993 for the Tax Free Fund, and November 19, 1998 for the
Money Market Fund, SM&R acts as investment adviser for and provides certain
investment-related administrative services to the Funds.
26
<PAGE>
As investment adviser, SM&R manages the investment and reinvestment of the
Company's assets, including the placing of orders for the purchase and sale of
portfolio securities. SM&R provides and evaluates economic, statistical and
financial information to formulate and implement Company investment programs.
All investments are reviewed quarterly by the Board to determine whether or not
such investments are within the policies, objectives and restrictions of the
Company.
Each Advisory Agreement continues in effect from year to year with respect
to a Fund so long as such continuance is specifically approved at least annually
by the Board or by a vote of majority of the outstanding voting securities of
the Fund, and in either case by the specific approval of a majority of the
directors who are not parties to such Agreement or "interested persons" (as such
term is defined in the 1940 Act) of any such parties, cast in person at a
meeting called for the purpose of voting on such approval. Each Advisory
Agreement may be terminated with respect to a Fund at any time, without the
payment of any penalty, by vote of the Board or by vote of the holders of a
majority of the outstanding voting securities of the Fund, or by SM&R, upon 60
days written notice to the other party. Each Advisory Agreement terminates
automatically in the event of its assignment, as such term is defined in the
1940 Act.
INVESTMENT ADVISORY FEE
Under its Advisory Agreements with the Company, SM&R receives the following
investment advisory fees:
GOVERNMENT BOND FUND AND TAX FREE FUND--A monthly investment advisory fee
computed by applying to the average daily net asset value of the Government Bond
Fund and the Tax Free Fund each month one-twelfth (1/12th) of the annual rate as
follows:
<TABLE>
<CAPTION>
ON THE PORTION OF EACH FUND'S INVESTMENT ADVISORY
AVERAGE DAILY NET ASSETS FEE ANNUAL RATE
- ----------------------------------------------------------------------- -------------------
<S> <C>
Not exceeding $100,000,000............................................. 0.50%
Exceeding $100,000,000 but not exceeding $300,000,000.................. 0.45%
Exceeding $300,000,000................................................. 0.40%
</TABLE>
PRIMARY FUND AND MONEY MARKET FUND--An investment advisory fee, computed and
paid monthly, at the annual rate of 0.25% of the Money Market Fund's and 0.50%
of the Primary Fund's average daily net asset value.
27
<PAGE>
For the past three fiscal years, SM&R received investment advisory fees from
each Fund as follows:
<TABLE>
<CAPTION>
ADVISORY FEES ADVISORY FEES ADVISORY FEES
FOR THE YEAR FOR THE YEAR FOR THE YEAR
ENDED ENDED ENDED
AUGUST 31, AUGUST 31, AUGUST 31,
1997 1998 1999
-------------- -------------- --------------
<S> <C> <C> <C>
Government Bond Fund....................... $ 113,231 $ 120,397 $
Tax Free Fund.............................. $ 50,224 $ 53,102 $
Primary Fund............................... $ 176,167 $ 174,328 $
Money Market Fund.......................... N/A N/A $
Company Total.............................. $ 339,622 $ 347,827 $
</TABLE>
ADMINISTRATIVE SERVICE AGREEMENT
Under an Administrative Service Agreement between the Company and SM&R dated
July 1, 1993, as amended on November 19, 1998 (the "Administrative Agreement"),
SM&R provides all non-investment related management, executive, administrative
and operational services to the Company. Pursuant to the Administrative
Agreement, SM&R also acts as transfer agent for the Funds' authorized and issued
shares and as dividend disbursing agent.
In its capacity as administrator under the Administrative Agreement, SM&R
furnishes and pays for the services of all officers and employees necessary to
perform the executive, administrative, clerical and bookkeeping functions of the
Company. SM&R's duties as administrator include, among other things:
administering the Company's affairs; maintaining office facilities; processing
purchase orders and redemption requests; furnishing statistical and research
data; and providing clerical, accounting, data processing, bookkeeping and
certain other services required by the Company.
In its capacity as transfer agent and dividend disbursing agent under the
Administrative Agreement, SM&R's duties include, but are not limited to:
dividend disbursements and transfer agency services; maintaining shareholder
accounts; preparing shareholder meeting lists and mailing and tabulating
proxies; mailing shareholder reports and other materials to shareholders; tax
withholding; and "blue sky" related services.
EXPENSES BORNE BY THE COMPANY
Pursuant to the Administrative Agreement, the Company pays other Company
expenses, such as interest, taxes, commissions and other expenses incidental to
portfolio transactions, Securities and Exchange Commission fees, Service Fees,
Distribution Fees, fees of the Custodian (see "The Custodian" herein), auditing
and legal expenses, fees and expenses of qualifying Company shares for sale and
maintaining such qualifications under the various state securities laws where
Company shares are offered for sale, fees and expenses of directors not
affiliated with SM&R, costs of maintaining corporate existence, costs of
printing and mailing prospectuses and shareholder reports to existing
shareholders and expenses of shareholders' meetings.
28
<PAGE>
ADMINISTRATIVE SERVICE FEE
Under the Administrative Agreement, SM&R receives a management and
administrative service fee from each Fund which is computed by applying to the
aggregate average daily net asset value of each Fund, each month one-twelfth
(1/12th) of the annual rate as follows:
<TABLE>
<CAPTION>
ADMINISTRATIVE
ON THE PORTION OF EACH FUND'S SERVICE
AVERAGE DAILY NET ASSETS FEE ANNUAL RATE
- ----------------------------------------------------------------------- -------------------
<S> <C>
Not exceeding $100,000,000............................................. 0.25%
Exceeding $100,000,000 but not exceeding $200,000,000.................. 0.20%
Exceeding $200,000,000 but not exceeding $300,000,000.................. 0.15%
Exceeding $300,000,000................................................. 0.10%
</TABLE>
Under the Administrative Agreement with the Company, SM&R has agreed to pay
(or to reimburse each Fund for) each Fund's expenses (including the advisory fee
and administrative service fee, if any, paid to SM&R, and any other fees
allocated to all classes of shares of a Fund based on average daily net assets,
but exclusive of interest, taxes, the Service Fee, the Distribution Fee,
commissions and other expenses incidental to portfolio transactions and any
other class-specific expenses) in excess of 1.25% per year of such Fund's (0.50%
for the Money Market Fund) average daily net assets.
FEE WAIVERS
In order to improve the yield and total return of a Fund, SM&R may, from
time to time, voluntarily waive or reduce all or any portion of its advisory
fee, administrative fee and/or assume certain or all expenses of that Fund while
retaining its ability to be reimbursed for such fees prior to the end of the
fiscal year. SM&R may rescind fee waivers and/or reductions, other than those
stated in the Administrative Agreement, at any time without notice to investors.
SM&R has voluntarily agreed to waive the advisory fee for the Tax Free Fund and
reimburse expenses incurred by the Government Bond and Primary Funds to the
extent that total expenses exceed average daily net assets as follows: Primary
Fund--0.80% and the Government Bond Fund--1.00% and Tax Free-- 0.75%.
During the years ended August 31, 1999, 1998, and 1997, SM&R reimbursed the
Company a total of $ , $116,461, and $162,949, respectively for
expenses of the Funds in excess of the expense limitation and/or any undertaking
then in existence. SM&R reimbursed expenses for each Fund during these periods
as follows: $ , $0, and $15,547, respectively, for the Government
Bond Fund; $ , $53,102, and $73,202, respectively for the Tax Free
Fund; $ , $63,359, and $74,200, respectively, for the Primary Fund.
During these periods, and $ for the Money Market Fund which
commenced operations on January 1, 1999.
29
<PAGE>
The administrative service fee is payable to SM&R whether or not the actual
expenses to SM&R for providing administrative services is more or less than the
amount of such fee. For the years ended August 31, 1999, 1998, and 1997, SM&R
received administrative service fees as follows.
<TABLE>
<CAPTION>
1997 1998 1999
--------- --------- ---------
<S> <C> <C> <C>
Administrative Service Fees for the Company.............. $ 169,811 $ 173,914 $
Administrative Service Fees for each Fund:............... $ 56,616 $ 60,199 $
Government Bond Fund................................... $ 25,112 $ 26,551 $
Tax Free Fund.......................................... $ 88,083 $ 87,164 $
Primary Fund........................................... N/A N/A $
Money Market Fund...................................... N/A N/A $
</TABLE>
PORTFOLIO TRANSACTIONS AND BROKERAGE ALLOCATION
SM&R, which supervises the Company's investments, is responsible for
effecting portfolio transactions through eligible securities brokers and
dealers, subject to the general supervision of the Company's Board of Directors.
Investment decisions are made by an Investment Committee of SM&R, and orders are
placed by persons supervised by that committee.
There is no arrangement or intention to place orders with any specific
broker or group of brokers. The paramount factors considered by SM&R in placing
orders are efficiency in the execution of orders and obtaining the most
favorable prices for the Company in both purchases and sales of portfolio
securities. In seeking the best prices and executions, purchases and sales of
securities which are not listed or traded on a securities exchange are generally
executed with a principal market maker acting as principal. SM&R continuously
evaluates the brokerage fees paid by each Fund to any affiliated person by
comparing such fees to those paid by other investment companies for similar
transactions as reported in various industry surveys.
Whenever the primary consideration of best price and best execution is met
to the satisfaction of SM&R, the brokers and dealers selected will include those
who provide supplementary statistical and research services. Such research
services include advice as to the advisability of investing in, purchasing or
selling securities, as well as analyses and reports concerning securities,
economic factors and trends. Such services and information may be used by SM&R
in servicing any fund it manages. Not all of these services or information may
be used by SM&R in connection with the Company. While SM&R is able to fulfill
its obligation to the Company without such information, its expenses might be
materially increased if it had to obtain and assemble such information through
its staff. However, the value of such information is not determinable. SM&R also
uses such information when rendering investment advisory services to the SM&R
Equity Funds, Investment Accounts and to American National and its other
accounts.
SM&R will authorize each Fund to pay an amount of commission for effecting a
securities transaction in excess of the amount of commission another
broker-dealer
30
<PAGE>
would have charged only if it determines in good faith that such amount of
commission is reasonable in relation to the value of the brokerage and research
services provided by such broker-dealer. Generally, the Funds pay higher than
the lowest commission rates available.
During the years ended August 31, 1999, 1998, and 1997, the Company paid no
brokerage fees for transactions in portfolio securities. No brokerage
commissions have been paid during the three most recent fiscal years to: (i) any
broker that is an affiliated person of the Company or an affiliated person of
that person; or (ii) any broker an affiliated person of which is an affiliated
person of the Company or SM&R.
Consistent with the Conduct Rules of the National Association of Securities
Dealers, and subject to seeking the best price and execution, the Company may
give consideration to sales of shares of the Company as a factor in the
selection of brokers and dealers to execute Company portfolio transactions.
If purchases or sales of securities of the Fund and one or more other
investment companies or clients managed by SM&R are considered at or about the
same time, transactions in such securities will be allocated among the several
investment companies and clients in a manner deemed equitable to all by SM&R,
taking into account the respective sizes of the Fund and such other investment
companies and clients and the amount of securities to be purchased or sold.
The Board has determined that such ability to effect simultaneous
transactions may be in the best interests of each Fund. It is recognized that in
some cases these practices could have a detrimental effect upon the price and
volume of securities being bought and sold by each Fund, while in other cases
these practices could produce better executions.
DESCRIPTION OF FUND SHARES
SHARES OF BENEFICIAL INTEREST
The Company's authorized capital stock consists of six billion
(6,000,000,000) shares of common stock with a par value of $0.01 per share,
issuable in separate series. Currently four such series have been
established--the Government Bond Fund, the Tax Free Fund, the Primary Fund, and
the Money Market Fund. The Government Bond Fund and the Tax Free Fund (the
"Multi-Class Funds") are each divided into six Classes of shares of common stock
designated as:
- Class T (existing shareholders and certain designated persons)
- Class A (front-end load)
- Class B (back-end load)
- Class C (level load)
- Class J
- Class Y (institutional shareholders)
31
<PAGE>
The Primary Fund and Money Market Fund do not have separate classes (that
is, each is a "Single-Class Fund").
The Company designates its capital stock as shares of the Funds. Each Fund
is, for investment purposes, considered a separate investment fund. The shares
of each Fund, when issued, will be fully paid and non-assessable, will have no
conversion, preemptive, or other subscription rights, and will be freely
transferable and redeemable. Each Fund bears its own liabilities and its
proportionate share of the general liabilities of the Company.
Each share of capital stock represents an interest in the assets of a
particular Fund and has no interest in the assets of any other Fund. Shares of a
Fund are equal with respect to distributions from income and capital gains,
except as described below. In the event of liquidation, each share of a Fund is
entitled to an equal portion of all the assets of that Fund after all debts and
expenses have been paid.
Each Class of shares of a Multi-Class Fund represents an interest in the
same portfolio of investments and each Class has the same rights as the other
Classes, except that each Class bears its own expenses and its proportionate
share of the general liabilities of that Fund. The net income attributable to
each Class and the dividends payable on the shares of that Class will be reduced
by the amount of the service and distribution (12b-1) fees of that Class and any
Class-specific expenses. Class B and Class C shares are subject to higher
distribution fees, which will cause such Classes to have a higher expense ratio
and pay lower dividends than the Class A shares.
Each Fund bears its proportionate share of the Company's general expenses
not susceptible of direct allocation. Such general expenses include the
Company's organizational expenses, directors' fees and joint fidelity bonds,
which are pro-rated based on the relative amount of each fund's assets, and
prospectus and shareholder report expenses, which are pro-rated based on the
relative number of each fund's shareholders. Organizational expenses for the Tax
Free Fund and the Money Market Fund were paid by the adviser.
VOTING RIGHTS
Within the respective Funds, all shares have equal voting, participation,
and liquidation rights, but do not have cumulative voting rights. With respect
to election of directors, non-cumulative voting means that the holders of more
than 50% of the shares voting for the election of directors can elect 100% of
the directors if they so choose, and in such event, holders of the remaining
shares will not be able to elect any directors.
On certain matters, such as the election of directors, all shares of each
Fund vote together, with each share having one vote. On other matters affecting
a particular Fund, such as the Investment Advisory Contract or fundamental
investment policies, only shares of that Fund are entitled to vote, and a
majority of the shares of that Fund are required for approval of the proposal.
On matters affecting a particular Class of a Fund,
32
<PAGE>
only shares of that Class of the Fund are entitled to vote, and a majority of
the shares of that Class are required for approval of the proposal.
INITIAL CAPITAL CONTRIBUTIONS
Prior to the Company's offering of any shares to investors, SM&R provided
the Company with initial capital by purchasing 100,000 shares of the Primary
Fund at a purchase price of $1.00 per share and 10,000 shares of the Government
Bond Fund at a purchase price of $10.00 per share. In addition, SM&R purchased
an additional 190,000 shares of the Government Bond Fund at a purchase price of
$10.00 per share, and American National purchased 400,000 shares of the
Government Bond Fund at a price of $10.00 per share. Such additional shares of
the Government Bond Fund were acquired by SM&R and American National in
connection with the formation of the Company, were acquired for investment and
can be disposed of only by redemption.
The Tax Free Fund initial capital was provided by SM&R through the purchase
of 10,000 shares at a price of $10.00 per share. In addition, SM&R purchased an
additional 90,000 shares and American National purchased 500,000 shares at a
price of $10.00 per share. These additional shares were acquired by SM&R and
American National in connection with the formation of the Fund for investment
and can only be disposed of by redemption.
Both SM&R's and American National's shares will be redeemed only when
permitted by the 1940 Act and when the other assets of the Fund are large enough
that such redemption will not have a material adverse effect upon investment
performance.
PURCHASE, REDEMPTION, AND PRICING OF SHARES
Certificates representing shares purchased are not issued. Investors have
the same ownership rights with respect to shares purchased as if certificates
had been issued. A confirmation will be sent to the investor promptly after each
share purchase.
All purchases must be in (or payable in) U.S. dollars. All checks must be
drawn in U.S. dollars on a U.S. bank. Investors will be subject to a service
charge on dishonored checks. The Company reserves the right to reject any order
for the purchase of its shares when in the judgment of management such rejection
is in the best interests of the Company.
DETERMINATION OF NET ASSET VALUE
GOVERNMENT BOND FUND AND TAX FREE FUND. The net asset value per share for
each Class of the Government Bond and Tax Free Funds is determined by adding the
market value of the portfolio securities and other assets of that Class
(including dividends accrued but not collected), subtracting liabilities of that
Class (including accrued expenses), and dividing the result by the number of
shares outstanding of the relevant Class. Net asset value is currently
determined as of 3:00 p.m. Central Time on each day that the New York Stock
Exchange is open for trading. Although the legal rights of the
33
<PAGE>
Classes of a Fund are substantially identical, the different expenses borne by
each Class will result in different net asset values and dividends for each
Class.
Expenses and fees of each such Fund, including the advisory fee and the
expense limitation reimbursement, if any, are accrued daily and taken into
account in determining net asset value. The portfolio securities of the Company
are valued as of the close of trading on each day when the New York Stock
Exchange is open for trading. Securities listed on national securities exchanges
are valued at the last sales price on such day, or if there is no sale, then at
the closing bid price therefor on such day on such exchange. The value of
unlisted securities is determined on the basis of the latest bid prices therefor
on such day. Debt obligations that are issued or guaranteed by the U.S.
Government, its agencies, authorities, and instrumentalities are valued on the
basis of prices provided by an independent pricing service. Prices provided by
the pricing service may be determined without exclusive reliance on quoted
prices, and may reflect appropriate factors such as yield, type of issue, coupon
rate, maturity and seasoning differential. Securities in corporate short-term
notes are valued at cost plus amortized discount, which approximates market
value. If no quotations are available for a security or other property, it is
valued at fair value as determined in good faith by the Board on a consistent
basis.
PRIMARY FUND. The net asset value per share of the Primary Fund is
determined by adding the market value of its portfolio securities and other
assets, subtracting liabilities, and dividing the result by the number of such
Fund's shares outstanding. Expenses of the Primary Fund, if any, are accrued
daily and taken into account in determining the net asset value. The portfolio
securities of the Primary Fund are valued as of 3:00 p.m. Central Time on each
day that the New York Exchange is open for trading. Securities listed on
national exchanges are valued at the last sales price on such day, or if there
is no sale, then at the closing bid price therefor on such day on such exchange.
The value of unlisted securities is determined on the basis of the latest bid
prices therefor on such day. Securities in corporate short-term notes are valued
at cost plus amortized discount, which approximates market value. Debt
securities with maturities in excess of 60 days are valued on the basis of
prices provided by an independent pricing service or brokers. If no quotations
are available for a security or other property, it is valued at fair value as
determined in good faith by the Board of Directors of the Company on a
consistent basis.
Securities subject to floating or variable interest rates with demand
features in compliance with applicable Rules of the Securities and Exchange
Commission may have stated maturities in excess of one year.
MONEY MARKET FUND. The Money Market Fund values all of its securities using
the amortized cost valuation method, which does not take into account unrealized
capital gains or losses. This involves valuing an instrument at its cost and
thereafter assuming a constant amortization to maturity of any discount or
premium, regardless of the impact of fluctuating interest rates on the market
value of the instrument. The other Funds use
34
<PAGE>
the amortized cost method only for valuing debt securities having maturities of
60 days or less.
During periods of declining interest rates, the daily yield on shares of the
Money Market Fund may tend to be higher than a like computation made by funds
with identical investments utilizing a method of valuation based upon market
prices and estimates of market prices for all of its portfolio instruments.
Thus, if the use of amortized cost by the Money Market Fund results in a lower
aggregate portfolio value on a particular day, a prospective investor in the
Fund would be able to obtain a somewhat higher yield than would result from
investment in a fund with identical investments utilizing solely market values,
and existing investors in the Fund would receive less investment income. The
converse would apply in a period of rising interest rates.
The valuation of the Money Market Fund's instruments based upon amortized
cost is subject to the Fund's adherence to certain conditions with respect to
its operation. The Fund must maintain a dollar-weighted average portfolio
maturity of 90 days or less, purchase instruments having a remaining maturity of
one year or less, and invest only in securities that the Board determines to be
of high quality with minimal credit risks.
Pursuant to the rules of the Securities and Exchange Commission, the Money
Market Fund follows procedures established by the Board that are designed to
stabilize, to the extent reasonably possible, the Money Market Fund's net asset
value at $1.00 per share. There can be no assurance that the Money Market Fund
will at all times be to maintain a continuous $1.00 net asset value per share.
These procedures include a review of the extent of any deviation of net asset
value per share as a result of fluctuating interest rates, based on available
market rates, from the Fund's $1.00 per share amortized cost price per share.
Should that deviation exceed 1/2 of 1%, the Board will consider whether any
action shall be initiated to eliminate or reduce material dilution or other
unfair results to shareholders. Where the Board believes the extent of any
deviation from the Fund's $1.00 amortized cost price per share may result in
material dilution or other unfair results to investors or existing shareholders,
it shall cause the Money Market Fund to take such action as it deems appropriate
to eliminate or to reduce to extent reasonably practicable such dilution or
unfair results, which may include: redeeming of shares in kind; selling
portfolio instruments prior to maturity to realize capital gains or losses;
shortening the Fund's average maturity; or withholding dividends.
DETERMINATION OF OFFERING PRICE
Shares of the Money Market Fund and the Primary Fund are offered at net
asset value without the imposition of any sales charge on purchases or
redemptions.
Full and fractional shares of the Government Bond Fund and Tax Free Fund are
purchased at the offering price, which is the net asset value next determined
after receipt of a purchase plus any applicable sales charge. The sales charge
is a percentage of the net asset value per share and will vary as shown below.
Purchases received by SM&R at its office in League City, Texas prior to 3:00
p.m., Central Time, on any day that the New
35
<PAGE>
York Stock Exchange is open for trading, will be executed at the applicable
offering price determined on that day. Purchases received thereafter will be
executed at the offering price determined on the next day that the New York
Stock Exchange is open for trading.
CLASS T SHARES (EXISTING SHAREHOLDERS). The offering price of the Class T
Shares of the Government Bond Fund and Tax Free Fund is the net asset value per
share plus an initial sales charge of up to 4.5% of the public offering price.
For amounts invested over certain levels, or "breakpoints" (beginning at
$100,000), you pay reduced sales charges. Certain purchasers of Class T shares
may qualify for a reduction or waiver of initial sales charges, as set forth in
the chart below and under "Special Purchase Plans" below and "Sales Charge
Reductions and Waivers" in the Class T Prospectuses. If you invest $500,000 or
more in Class T shares, there is no initial sales charge.
The offering price of Class T shares is the next determined net asset value
plus a sales charge, if applicable, (expressed as a percentage of the offering
price) shown in the following table:
<TABLE>
<CAPTION>
DISCOUNT TO
SALES CHARGE AS A SALES CHARGE AS A SELECTED DEALERS AS
PERCENTAGE OF PERCENTAGE OF NET A PERCENTAGE OF
AMOUNT OF INVESTMENT OFFERING PRICE AMOUNT INVESTED OFFERING PRICE*
- ----------------------------------- ----------------- ----------------- -------------------
<S> <C> <C> <C>
Less than $100,000................. 4.5% 4.7% 4.0%
$100,000 but less than $250,000.... 3.5% 3.6% 3.0%
$250,000 but less than $500,000.... 2.5% 2.6% 2.25%
$500,000 and over.................. None None None
</TABLE>
* For Class T shares (as well as for shares of the Primary and Money Market
Funds), SM&R may, in certain circumstances, provide compensation (from its
own profits and resources) to broker-dealers in addition to these discounts.
CLASS A SHARES (FRONT-END LOAD). Class A shares are subject to an initial
sales charge of up to 4.75% of the public offering price and an annual 12b-1 fee
of 0.25% of the average daily net assets of the Class A shares. For amounts
invested over certain levels, or "breakpoints" (beginning at $50,000), you pay
reduced sales charges. Certain purchasers of Class A shares may qualify for a
reduction or waiver of initial sales charges, as set forth in the chart below
and under "Special Purchase Plans" below and "Sales Charge Reductions and
Waivers" in the Prospectuses. If you invest $1 million or more in Class A
shares, there is no initial sales charge, but such shares will be subject to a
contingent deferred sales charge ("CDSC") of 1.00% of the net asset value on
redemptions within 13 months of purchase.
36
<PAGE>
The offering price of Class A shares is the next determined net asset value
plus a sales charge (expressed as a percentage of the offering price) shown in
the following table:
<TABLE>
<CAPTION>
DISCOUNT TO
SALES CHARGE AS A SALES CHARGE AS A SELECTED DEALERS AS
PERCENTAGE OF PERCENTAGE OF NET A PERCENTAGE OF
AMOUNT OF INVESTMENT OFFERING PRICE AMOUNT INVESTED OFFERING PRICE
- ----------------------------------- ----------------- ----------------- -------------------
<S> <C> <C> <C>
Less than $50,000.................. 4.75% 4.9% 4.25%
$50,000 but less than $100,000..... 4.5% 4.7% 4.0%
$100,000 but less than $250,000.... 3.5% 3.6% 3.0%
$250,000 but less than $500,000.... 2.5% 2.6% 2.25%
$500,000 but less than
$1,000,000....................... 1.5% 1.5% 1.25%
$1,000,000 and over*............... None** None None
</TABLE>
* For Class A shares (as well as for shares of the Primary and Money Market
Funds), SM&R may, in certain circumstances, provide compensation (from its
own profits and resources) to broker-dealers in addition to these discounts.
** Subject to a CDSC of 1.00% of the net asset value on shares redeemed within
13 months of purchase.
CLASS B SHARES (BACK-END LOAD).
An investor pays no initial sales charge upon the purchase of Class B
shares, but such shares are subject to a CDSC that declines from 3.00% to zero,
calculated as a percentage of the amount invested, imposed on certain
redemptions made within four years of purchase. Class B shares are subject to an
annual 12b-1 fee of 0.75% of the average daily net asset value of the Class B
shares.
Class B shares are sold at net asset value subject to a contingent deferred
sales charge (expressed as a percentage of the net asset value) shown in the
following table:
<TABLE>
<CAPTION>
CONTINGENT DEFERRED
SALES CHARGE
(AS A PERCENTAGE OF
NET ASSET VALUE AT
THE TIME OF
PURCHASE, WHICHEVER
YEARS SINCE PURCHASE IS LESS)
- -------------------------------------------------------------------------
<S> <C>
Year 1................................................ 3%
Year 2................................................ 2%
Year 3................................................ 1%
Year 4+............................................... 0%
</TABLE>
If the net asset value of shares being redeemed has increased above the
initial purchase price, no CDSC is imposed on amounts attributable to such
increase in net asset value. No CDSC is assessed on shares derived from
reinvestment of dividends or capital gain distributions. The Company will
minimize any applicable CDSC payable by assuming that an investor (i) first
redeems Class B shares owned through reinvested dividends and capital gains
distributions, and (ii) next redeems Class B shares held the longest.
37
<PAGE>
Each Class B share converts automatically to Class A shares of equal dollar
value after the investor has owned Class B shares for eight (8) years. Dividends
and other distributions paid to an investor in the form of additional Class B
shares also will convert to Class A shares on a pro-rata basis. The conversion
benefits shareholders because Class A shares are not subject to an ongoing
Distribution Fee. If an investor converts Class B shares of a Multi-Class Fund
for Class B shares of another fund managed by SM&R, the purchase date of the
original investment will be used to determine the appropriate conversion date.
CLASS C SHARES (LEVEL LOAD). The Multi-Class Funds offer Class C shares at
their respective net asset value plus an initial sales charge of 1.00% of the
offering price. A contingent deferred sales charge of 1.00% is also assessed on
redemptions of Class C shares during the first thirteen months after purchase.
Class C shares are subject to an annual 12b-1 fee of 1.00% of the average daily
net asset value of the Class C shares.
CLASS Y SHARES. Class Y shares are no-load shares of the Multi-Class Funds
offered through certain financial intermediaries (such as broker-dealers and
investment advisers) that have distribution agreements with SM&R. Class Y shares
are available to institutions and certain other investors, as described in the
Prospectus for the Class Y shares. Like the Single Class shares, Class Y shares
are offered at net asset value without the imposition of any sales charge on
purchases or redemptions or any distribution and service ("12b-1") fees.
Accordingly, the Offering Price for Class Y shares of each Multi-Class Fund is
that Class' net asset value.
CLASS J SHARES. Class J shares of the Multi-Class Funds are offered through
mutual fund "supermarkets" that have distribution agreements with SM&R. Like the
Single Class shares, Class J shares are offered at net asset value without the
imposition of any sales charge on purchases or redemptions. Accordingly, the
Offering Price for Class J shares of each Multi-Class Fund is that Class' net
asset value. Class J shares are subject to an annual 12b-1 fee of .75% of the
average daily net asset value of the Class J shares.
REDUCTION AND/OR WAIVER OF INITIAL SALES CHARGES (CLASS A AND CLASS T SHARES)
DISCOUNTS THROUGH CONCURRENT PURCHASES. Investors may qualify for a reduced
sales charge on Class T shares or Class A shares. To qualify, the investor may
combine concurrent purchases of Class T and Class A shares of a Multi-Class Fund
and the Class T and Class A shares of another Multi-Class Fund at the respective
sales charges applicable to each.
Investors that are eligible to combine concurrent purchases to qualify for a
reduced sales charge include:
(1) Any individual
(2) Any individual, his or her spouse, and trusts or custodial accounts for
their minor children
(3) A trustee or fiduciary of a single trust estate or single fiduciary
account
38
<PAGE>
(4) Tax-exempt organizations specified in Sections 501(c)(3) or (13) of the
Internal Revenue Code, or employees' trusts, pension, profit-sharing, or
other employee benefit plans qualified under Section 401 of the Internal
Revenue Code
(5) Employees (or employers on behalf of employees) under any employee
benefit plan not qualified under Section 401 of the Internal Revenue Code
Purchases in connection with employee benefit plans not qualified under
Section 401 of the Internal Revenue Code will qualify for the above quantity
discounts only if the fund will realize economies of scale in sales effort and
sales related expenses as a result of the employer's or the plan's bearing the
expense of any payroll deduction plan, making the fund's prospectus available to
individual investors or employees, forwarding investments by such employees to
the funds, and the like.
DISCOUNTS THROUGH A RIGHT OF ACCUMULATION. If you already own Class T or
Class A shares of a fund managed by SM&R, on which you paid a front-end sales
load, you may be able to receive a discount when you buy additional shares. The
current net asset value of the shares you already own may be
"accumulated"--I.E., combined together with the dollar amount being invested to
achieve quantities eligible for discount.
LETTER OF INTENT. You may qualify immediately for a reduced sales charge
the Letter of Intent section of the Account Application. Shareholders may
qualify for a reduced sales charge on purchases of Class T shares and Class A
shares of funds managed by SM&R by completing a Letter of Intent (See "Letter of
Intent" in the Prospectuses). A minimum initial investment equal to 10% of the
amount necessary for the applicable reduced sales charge is required when a
Letter of Intent is executed. Investments made under a Letter of Intent will
purchase shares at the total sales charge rate applicable to the specified total
investment. SM&R will hold in escrow from the initial investment shares equal to
5% of the amount of the total intended investment. Such escrow shares may not be
exchanged for or reinvested in shares of another fund and, subject to the right
of early cancellation described below, will not be released until the amount
purchased equals the commitment set forth in the Letter of Intent. If the
intended investment is not completed during the 13-month period, the difference
between the sales charge actually paid and the sales charge applicable to the
total of such purchases made will be deducted from the escrow shares if not paid
by the investor within twenty days after the date notice thereof has been mailed
to such investor.
A Letter of Intent agreement can be canceled prior to the end of the
13-month period and escrow shares released to the investor if the investor pays
the difference between the sales charge paid and the sales charge applicable to
the amount actually invested and agrees that such Letter of Intent agreement is
canceled and no longer in effect.
The offering value of the shares of funds managed by SM&R currently owned,
and previously subject to a front-end sales load, may also be included in the
aggregate amount of an investment covered by a Letter of Intent.
39
<PAGE>
For example, if an investor owns shares of the Government Bond Fund, the Tax
Free Fund or shares of one or more SM&R Equity Funds currently valued at $80,000
and intends to invest $25,000 over the next thirteen months in the Government
Bond Fund and/or the Tax Free Fund, such investor may execute a Letter of Intent
and the entire $25,000 will purchase shares of either or all of such funds at
the reduced sales charge rate applicable to an investment of $100,000 or more. A
Letter of Intent does not represent a binding obligation on the part of the
investor to purchase or the Government Bond Fund or the Tax Free Fund to sell
the full amount of shares specified.
WAIVER OF CLASS A AND CLASS T INITIAL SALES CHARGE FOR SPECIAL
PURCHASERS. After receipt of written request by SM&R, Class A and Class T
shares of the Government Bond Fund and the Tax Free Fund may be purchased by
certain purchasers designated in the Class T and Class A Prospectuses at net
asset value per share without the imposition of any sales charge.
REDUCTION AND/OR WAIVER OF CONTINGENT DEFERRED SALES CHARGE (CLASS B SHARES)
The CDSC will be waived on the following redemptions of Class B shares:
(1) 12% FREE AMOUNT. The CDSC will be waived on redemptions pursuant to a
systematic withdrawal plan of up to 12% of account value per year. We
apply this 12% waiver on a per fund basis to the account value determined
at the time you elect a systematic withdrawal plan (amounts not subject
to a CDSC, such as appreciation and reinvested dividends, are withdrawn
first).
(2) DEATH OR DISABILITY. The CDSC will be waived on redemptions of Class B
shares following the shareholder's death or disability, so long as:
(a) the disability began after the shares were purchased;
(b) SM&R is notified of such death or disability at the time of the
redemption request and receives satisfactory evidence of such death
or disability;
(c) the redemptions are made within one year following death or initial
determination of disability; and
(d) the shares were held at the time of death or initial determination of
disability.
For purposes of this waiver, the death or disability must meet the
definition in Section 72(m)(7) of the Internal Revenue Code (the "Code"). If
the shares are held in a joint account, then all registered joint owners
must be dead or disabled.
(3) MINIMUM REQUIRED DISTRIBUTIONS. The CDSC will be waived on redemptions
of Class B shares in connection with certain distributions from four
types of qualified retirement plans: IRAs, custodial accounts maintained
pursuant to Code Section 403(b), deferred compensation plans qualified
under Code 457 and plans qualified under Code Section 401. To qualify for
the waiver, the redemptions must result from one of the following:
40
<PAGE>
(a) required minimum distributions to plan participants or beneficiaries
who are age 70 1/2 or older to the extent it does not exceed 12%
annually of the participants or beneficiary's account value;
(b) tax-free rollovers or transfers of assets to another IRA, Section
403(b) plan, Section 457 plan, or Section 401 plan invested in Class
B shares of one or more funds managed by SM&R;
(c) tax-free returns of excess contributions or returns of excess
deferral amounts; and
(d) distributions upon the death or disability (as defined in the Code)
of the participant or beneficiary.
(4) SMALL ACCOUNTS. We waive the CDSC on redemptions by the funds of small
accounts (accounts with a value less than $500).
(5) SM&R INVESTMENTS. We waive the CDSC on redemptions of shares owned by
SM&R or any of its affiliates.
FUND AND CLASS EXPENSES
Expenses that are directly attributable to a particular Class of shares
("Class Expenses") will be borne solely by that Class. Class expenses include:
(1) asset-based distribution fees and shareholder service fees;
(2) transfer agency fees attributable to a particular Class;
(3) expenses related to preparing, printing, mailing, and distributing
materials such as shareholder reports, prospectuses, and proxy statements
to current shareholders of a specific Class;
(4) state and federal registration fees incurred by a specific Class;
(5) litigation and other legal expenses relating to a particular Class;
(6) directors' fees and expenses incurred as a result of issues relating
solely to a particular Class;
(7) accounting, audit, and tax expenses relating to a specific Class;
(8) the expenses of administrative personnel and services required to
support the shareholders of a specific Class; and
(9) fees and other payments made to entities performing services for a
particular Class, including account maintenance, dividend disbursing, or
subaccounting services.
Class Expenses may be waived or reimbursed by SM&R, the Fund's investment
adviser and distributor. Investment advisory fees, custodial fees, and other
expenses relating to the management of the Company's assets shall not be
allocated on a class-specific basis. Income, realized and unrealized capital
gains and losses, and expenses that
41
<PAGE>
are not allocated to a specific Class shall be allocated to each Class on the
basis of the proportionate net assets of that Class in relation to the net
assets of the Multi-Class Fund.
All direct sales expenses for the Primary Fund and the Money Market Fund,
including the cost of prospectuses for prospective shareholders, are paid by
SM&R, and no sales expense is borne by those Funds.
SHAREHOLDER SERVICING AND DISTRIBUTION PLAN
The Company adopted a Distribution and Shareholder Servicing Plan (the
"12b-1 Plan") pursuant to Rule 12b-1 under the 1940 Act for the Class A, Class
B, Class C, and Class J shares of the Government Bond Fund and the Tax Free Fund
(as defined above, the "Multi-Class Funds"). The 12b-1 Plan provides that SM&R
will provide distribution and/or shareholder services to the Class A, Class B,
Class C, and Class J shares of the Multi-Class Funds (the "12b-1 Classes").
For each 12b-1 Class and regardless of actual expenses, SM&R is entitled to
receive a Distribution Fee and/or Service Fee, as applicable, computed as an
annual percentage of the value of the average daily net assets of the
Multi-Class Fund attributable to that Class, as follows:
<TABLE>
<CAPTION>
DISTRIBUTION SERVICE TOTAL 12B-1
CLASS FEE FEE FEE
- ---------------------------------------------------------- ------------- --------- -----------
<S> <C> <C> <C>
Class T Shares: Existing Shareholders..................... -0- -0- -0-
Class A Shares: Front-End Load............................ 0.25% -0- 0.25%
Class B Shares: Back-End Load (CDSC)...................... 0.50% 0.25% 0.75%
Class C Shares: Level Load................................ 0.75% 0.25% 1.00%
Class J Shares: Network................................... 0.75% -0- 0.75%
Class Y Shares: Institutional............................. -0- -0- -0-
</TABLE>
(1) The Distribution Fee and/or Service Fee, as applicable, to be paid under the
12b-1 Plan will be calculated daily (as a percentage of average daily net
assets) and paid periodically.
The purpose of the Distribution Fee is to compensate SM&R, or enable SM&R to
compensate other persons, including any distributor of shares of the 12b-1
Classes, for services that are primarily intended to result in or primarily
attributable to the sale of the 12b-1 Classes ("Selling Services"). The purpose
of the Service Fee is to compensate SM&R, or enable SM&R to compensate other
persons, for providing ongoing servicing to shareholders of the Funds
("Shareholder Services").
"Selling Services" include the training and supervision of sales personnel;
advertising, marketing, and other promotional expenses, including the costs of
preparing and printing sales literature; printing prospectuses and statements of
additional information and distributing them to prospective investors in 12b-1
Classes; and distributing shares of the 12b-1 Classes. Payments for Selling
Services may include payment for overhead and
42
<PAGE>
other office expenses that are related to the distribution of the 12b-1 Classes.
SM&R also may reimburse the expenses of persons who provide support services in
connection with the distribution of the 12b-1 Classes, and may make payments to
financial intermediaries that sell shares of the 12b-1 Classes. "Shareholder
Services" include all forms of shareholder liaison services that SM&R deems
appropriate, including maintaining shareholder accounts, providing shareholder
liaison services, responding to customer inquiries, and providing shareholders
with information on their investments and about the 12b-1 Classes.
The 12b-1 Plan, and any related agreement, continues in effect with respect
to a 12b-1 Class only if such continuance is specifically approved at least
annually by either the Board or the shareholders of that 12b-1 Class and, in
either case, by a majority vote of those directors who are not interested
persons of the Fund and who have no direct or indirect financial interest in the
operation of this Plan or in such agreement (the "Independent Directors"), cast
in person at a meeting called for the purpose of voting on this Plan and/or the
related agreement. The 12b-1 Plan may be terminated with respect to any 12b-1
Class at any time, by vote of a majority of the Independent Directors or by a
vote of a majority of the outstanding voting securities of the relevant Class.
Any distribution and shareholder services agreement related to the 12b-1
Plan terminates automatically upon its assignment. Moreover, with respect to
each 12b-1 Class of a Multi-Class Fund, any distribution and shareholder
services agreement related to that 12b-1 Class may be terminated at any time,
without the payment of any penalty, (1) by the Board or by a vote of the 12b-1
Class' outstanding shareholders, on 60 days written notice to SM&R, or (2) by
SM&R, on 60 days written notice to the Company.
The 12b-1 Plan provides that it may not be amended with respect to any 12b-1
Class of a Multi-Class Fund to increase materially the amount of the fees
described in such Plan without approval of the shareholders of the relevant
Class. All material amendments to the Plan also must be approved by the Board in
the manner described above and in the 12b-1 Plan.
In each year during which this Plan remains in effect with respect to a
12b-1 Class, SM&R (and any other person authorized to direct the disposition of
monies paid or payable by the relevant Fund pursuant to the Plan or any related
agreement) will prepare and furnish to the Board, and the Board will review, at
least quarterly, written reports complying with the requirements of Rule 12b-1,
which set out the amounts expended under this Plan and the purposes for which
those expenditures were made. The obligations of the Company and each Fund under
the 12b-1 Plan will not be binding upon any of the directors, shareholders,
nominees, officers, employees or agents, whether past, present or future, of the
Company, individually, but are binding only upon the assets and property of the
Company and the relevant Funds or Funds, as provided in the Company's Articles
of Incorporation.
43
<PAGE>
For the fiscal year ended August 31, 1999 12b-1 fees paid by each Fund class
were as follows:
<TABLE>
<CAPTION>
DISTRIBUTION
SERVICE FEE FEE
----------- ---------------
<S> <C> <C>
Government Bond
Class A......................................................
Class B......................................................
Class C......................................................
Class J......................................................
Class Y......................................................
Tax Free Fund
Class A......................................................
Class B......................................................
Class C......................................................
Class J......................................................
Class Y......................................................
</TABLE>
The Primary Fund and Money Market Fund shares do not pay 12b-1 fees.
SPECIAL PURCHASE PLANS
AUTOMATIC INVESTMENT PLAN AND ELECTRONIC TRANSFERS
Classes A, B and C provide a convenient, voluntary method of purchasing
their shares through "Automatic Investment Plan." Classes A, B, C, T and Y allow
for the use of the "Electronic Transfers." These plans are referred to as a
"Plan" or "Plans." The principal purposes of such Plans are to encourage thrift
by enabling investors to make regular purchases in amounts less than normally
required, and, in the case of the Government Bond Fund and the Tax Free Fund, to
employ the principle of dollar cost averaging described below. INVESTORS SHOULD
BE AWARE THAT ANY APPLICABLE SALES CHARGE WILL APPLY TO PURCHASES MADE THROUGH A
PLAN.
By acquiring shares of the Government Bond Fund and the Tax Free Fund on a
regular basis pursuant to a Plan, or investing regularly on any other systematic
plan, the investor takes advantage of the principle of Dollar Cost Averaging.
Under Dollar Cost Averaging, if a constant amount is invested at regular
intervals at varying price levels, the average cost of all the shares will be
lower than the average of the price levels. This is because the same fixed
number of dollars buys more shares when price levels are low and fewer shares
when price levels are high. It is essential that the investor consider his or
her financial ability to continue this investment program during times of market
decline as well as market rise. The principle of Dollar Cost averaging will not
protect against loss in a declining market, as a loss will result if the Plan is
discontinued when the market value is less than cost.
A Plan may be opened by indicating an intention to invest $20 or more (per
individual) in the Government Bond Fund or the Tax Free Fund or $100 or more in
the
44
<PAGE>
Primary Fund or Money Market Fund monthly for at least one year. The investor
will receive a confirmation showing the number of shares purchased, purchase
price, and subsequent new balance of shares accumulated.
An investor has no obligation to invest regularly or to continue
participating in a Plan, which may be terminated by the investor at any time
without penalty. Under a Plan, any distributions of income and realized capital
gains will be reinvested in additional shares at net asset value unless a
shareholder instructs SM&R in writing to pay them in cash. SM&R reserves the
right to increase or decrease the amount required to open and continue the Plan,
and to terminate any shareholder's right to participate in the Plan if after one
year the value of the amount invested is less than $500 in the Government Bond
Fund or the Tax Free Fund or $1,000 in the Primary Fund or Money Market Fund.
GROUP SYSTEMATIC INVESTMENT PLAN
A Group Systematic Investment Plan is available for purchases of Class A,
Class B or Class C shares. This Plan provides employers and employees with a
convenient means for purchasing shares of the Company under various types of
employee benefit and thrift plans, including payroll deduction and bonus
incentive plans. The plan may be started with an initial cash investment of $100
($20 per individual) in the Government Bond Fund or the Tax Free Fund or $1,000
in the Primary Fund or Money Market Fund for a group consisting of five or more
participants. The shares purchased by each participant under the Plan will be
credited to a separate account in the name of each investor in which all
dividends and capital gains will be reinvested in additional shares of the
applicable Fund at net asset value (plus a sales charge, if applicable). Such
reinvestments will be made at the start of business on the day following the
record date for such dividends and capital gains distributions. To keep his or
her account open, subsequent payments in the amount of $20 must be made into
each participant's account. If the group is reduced to less than five
participants, the minimums set forth under "Systematic Investment Plan and
Electronic Transfer Service" shall apply. The plan may be terminated by SM&R or
the shareholder at any time upon sixty (60) days' prior written notice.
EXCHANGE PRIVILEGE
You may make exchanges, without charge, between corresponding classes of
shares of funds managed by SM&R on terms described in the Prospectuses.
You may exchange shares you own in the Primary Fund for shares of the Money
Market Fund and vice versa.
You also may exchange your Class A, B, T, Y, and J shares for shares of the
Primary and Money Market Fund, subject to two conditions:
- any applicable CDSC period has expired on the shares you wish to exchange
(I.E., 13 months in the case of Class A shares and 3 years in the case of
Class B shares), and
45
<PAGE>
- you meet any minimum investment requirement for the shares you wish to
acquire.
You CANNOT exchange Class C shares for shares of the Money Market Fund or
Primary Fund.
You may exchange shares you own in the Primary or Money Market Fund for
Class A, T, Y, and J shares of another fund managed by SM&R, provided you meet
any eligibility requirements and pay any sales charge applicable to the acquired
shares. You CANNOT exchange shares of the Money Market Fund or Primary Fund for
Class B or C shares of another fund.
We waive any sales charges on Class A and Class T shares acquired through an
exchange if you previously paid a sales charge on amounts invested in those
shares. In other words, we will never impose a front-end sales charge on the
same investments TWICE. If the exchanged shares were acquired through
reinvestment of dividends or capital gains distributions while in a Class that
imposes a front-end sales charge, we deem amounts invested in those shares to
have previously paid a sales charge for purposes of the exchange privilege.
For example, assume you purchase Class T shares of the Government Bond Fund.
You then exchange all your Class T shares (including shares acquired through
reinvestment of dividends and capital gains distributions) for shares of the
Money Market Fund. Later, you re-exchange those shares of the Money Market Fund
for Class T shares of the Tax Free Fund. We would not impose any sales charge
upon re-exchange into Class T shares because you previously paid a sales charge
on amounts invested in those shares.
Shares of any fund held in escrow under a Letter of Intent are not eligible
for the exchange privilege. Such shares will not be released from escrow until
the balance invested during the period specified in the Letter of Intent equals
or exceeds the amount required to be invested under the Letter of Intent or the
shareholder requests, in writing, that the Letter of Intent be canceled and pays
any adjustments in sales charge. After release from escrow, shares may be
exchanged, provided all other applicable conditions are met.
The exchange privilege does not give an investor the option or right to
purchase securities, but is a revocable privilege permitted under the present
policies of each of the Funds. SM&R reserves the right to restrict the frequency
of or otherwise modify, condition, terminate or impose additional charges upon
the exchange privilege. ANY GAIN OR LOSS REALIZED ON AN EXCHANGE OR RE-EXCHANGE
MAY BE RECOGNIZED FOR FEDERAL AND STATE INCOME TAX PURPOSES. YOU SHOULD CONSULT
YOUR TAX ADVISOR FOR THE TAX TREATMENT AND EFFECT OF EXCHANGES.
The minimum number of shares of a Fund that may be exchanged is the number
of shares of the Fund that have a net asset value on the date of such exchange
that is equal to the minimum initial or subsequent investment, as the case may
be, of the Fund or SM&R Equity Funds into which the exchange is being made.
46
<PAGE>
REDEMPTION
Any shareholder may redeem all or any part of his shares by submitting a
written request to SM&R as the Company's agent for such purpose. Such requests
must be duly executed by each registered owner, must be accompanied by
certificates endorsed for transfer (if certificates have been issued), and must
contain a signature guarantee. The signature guarantee carries with it certain
statutory warranties relied upon by the transfer agent. This guarantee is
designed to protect the investor, the funds, SM&R, and its representatives
through the signature verification of each investor wishing to redeem or
exchange shares.
Signatures may be guaranteed by an "eligible guarantor institution" as
defined in rules adopted by the Securities and Exchange Commission. Eligible
guarantor institutions generally include banks, brokers, dealers, municipal
securities dealers or brokers, government securities dealers or brokers, credit
unions, national securities exchanges, registered securities associations and
institutions that participate in the Securities Transfer Agent Medallion Program
("STAMP") or other recognized signature guarantee medallion program or an SM&R
representative who has executed an agreement and received authorization from
SM&R. WITNESSING OR NOTARIZATION IS NOT SUFFICIENT.
No signature guarantees are required on the written request for redemption
by a shareholder of record when payment is to be made to such shareholder of
record at such shareholder's address of record and the value of the shares
redeemed is $50,000 or less. In all other cases the signatures on the request
for redemption, as well as on certificates being tendered, must be guaranteed.
On all redemption requests for joint accounts, the signatures of all joint
owners are required. Redemptions may also be requested by telephone, see "HOW TO
REDEEM" in the Shareholder's Guide. Corporations, executors, divorced persons,
administrators, trustees or guardians will be required to submit further
documentation. Any applicable CDSC must be paid upon redemption.
Shares are redeemed at the net asset value per share next computed after the
request and certificates issued prior to January 1, 1999, if any, are received
in "Good Order" as set forth above. Any applicable CDSC must be paid at the time
of redemption. (See "Important Facts About Redeeming" in the Shareholder's
Guide). A shareholder may receive more or less than he paid for his shares,
depending on the prevailing market value of the portfolio value of the Fund
being redeemed and the applicable CDSC.
Redemption checks are delivered as soon as practicable and normally will be
sent to the investor within seven days following the date on which redemption is
made.
At various times the Company may be requested to redeem shares for which it
has not yet received good payment for prior purchases of Company shares.
Accordingly, proceeds of the Company will not be paid until good payment has
been received which could be as much as ten (10) business days after the
purchase, or until SM&R can verify that good payment (for example, cash or
certified check on a United States bank) has been, or will be, collected for the
purchase of such shares.
47
<PAGE>
The right of redemption is subject to suspension and payment therefor
postponed during any period when the New York Stock Exchange is closed other
than customary weekend or holiday closings, or during which trading on such
Exchange is restricted; for any period during which an emergency exists, as a
result of which disposal by the Company of its securities is not reasonably
practicable or it is not reasonably practicable for the Company to fairly
determine the value of its net assets; or for such other periods as the
Commission has by order permitted such suspension for the protection of the
Company's security holders.
The Company has made an election under the 1940 Act to pay in cash all
requests for redemption by any shareholder of record, limited in amount with
respect to each shareholder during any ninety-day period to the lesser of (i)
$250,000 or (ii) 1% of the net asset value of the Company at the beginning of
such period. The Company may pay the redemption price, if any, in excess of the
amounts described above in whole or in part in portfolio securities, at the
market value thereof determined as of the close of business next following
receipt of the request in proper form, if deemed advisable by the Board of
Directors. In such case a shareholder would incur brokerage costs if he sold the
securities received.
TAXES
ELECTION TO BE TAXED AS A REGULATED INVESTMENT COMPANY
Each fund is treated as a separate entity for federal income tax purposes.
The Company has elected to be treated as a regulated investment company under
Subchapter M of the Internal Revenue Code. The Company intends to distribute all
of its net investment income and net realized capital gains to shareholders in a
timely manner. Therefore, it is not expected that the Company will be required
to pay federal income taxes.
In order to qualify as a regulated investment company, each Fund of the
Company must meet several requirements. These requirements include the
following: (1) at least 90% of the Fund's gross income must be derived from
dividends, interest, payments with respect to securities loans, gains from the
sale or disposition of stock, securities or foreign currencies or other income
derived in connection with the Fund's investment business and (2) at the close
of each quarter of the Fund's taxable year, (a) at least 50% of the value of the
Fund's assets must consist of cash, United States Government securities,
securities of other regulated investment companies and other securities (limited
generally with respect to any one issuer to not more than 5% of the total assets
of the Fund and not more than 10% of the outstanding voting securities of such
issuer) and (b) not more than 25% of the value of the Fund's assets may be
invested in the securities of any issuer (other than United States Government
Securities or securities of other regulated investment companies) or of two or
more issuers which the Fund controls and which are determined to be engaged in
similar or related trades or businesses.
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<PAGE>
In addition, each Fund must distribute to its shareholders at least 90% of
its net investment income and net tax-exempt income for each of its taxable
years. If a Fund fails to qualify as a regulated investment company, the Fund
will be subject to federal, and possibly state, corporate taxes on its taxable
income and gains, and distributions to its shareholders will be taxed as
ordinary dividend income to the extent of such Fund's available earnings and
profits.
EXCISE TAX
In order to avoid federal excise taxes, each Fund is required to distribute
to its shareholders at least 98% of its taxable ordinary income earned during
the calendar year and 98% of its capital gain net income earned during the
twelve month period ending on October 31 (in addition to undistributed amounts
from the prior year). The Funds intend to declare and pay sufficient dividends
in a manner that will comply with such distribution requirements but can give no
assurances that their distributions will be sufficient to eliminate all such
excise taxes.
DISTRIBUTIONS OF INVESTMENT INCOME AND CAPITAL GAINS
For federal income tax purposes, any income dividends derived from taxable
investments which the shareholder receives from a fund, as well as any
distributions derived from net short-term capital gains, are treated as ordinary
income whether the shareholder has elected to receive them in cash or in
additional shares. Distributions derived from net long-term capital gains will
be taxable as long-term capital gains regardless of the length of time the
shareholder has owned such fund's shares and regardless of whether such
distributions are received in cash or in additional shares. In determining the
amount of capital gains, if any, available for distribution, net capital gains
are offset against available net capital losses, if any, carried forward from
previous years.
Distributions which are declared in October, November, or December and paid
to shareholders in January of the following year will be treated for tax
purposes as if they had been received by the shareholders on December 31 of the
year in which they were declared.
At the end of each calendar year, the Company will advise shareholders about
the tax status of all distributions made during each taxable year, including the
portion of the dividends which comprise taxable income, exempt income and
interest income that is a tax preference item under the alternative minimum tax.
Shareholders should consult a tax advisor about the application of state and
local tax laws to these distributions and redemption proceeds received from the
Company.
Many states grant tax-free status to dividends paid to shareholders of
mutual funds from interest income earned by the fund from direct obligations of
the U.S. Government, subject in some states to minimum investment requirements
that must be met within the fund. Because the rules on exclusion of this income
are different for corporations, corporate shareholders should consult with their
corporate tax advisors about whether any of the distributions may be exempt from
corporate income or franchise taxes.
49
<PAGE>
Dividends paid by the Tax Free Fund that are derived from interest earned on
qualifying tax-exempt obligations are expected to be "exempt-interest" dividends
that shareholders may exclude from their gross income for federal income tax
purposes if the fund satisfies certain quarterly asset percentage requirements.
To the extent that the Tax Free Fund invests in bonds, the interest on which is
a specific tax preference item for federal income tax purposes ("AMT-Subject
Bonds"), any exempt-interest dividends derived from interest on AMT-Subject
bonds will be a specific tax preference item for purposes of the federal
individual and corporate alternative minimum taxes. All exempt-interest
dividends will be a component of the "current earnings" adjustment item for
purposes of the federal corporate alternative minimum income tax. Current
federal tax law limits the types and volume of securities qualifying for the
federal income tax exemption of interest and may also affect the availability of
municipal obligations for investment by the fund and the value of the fund's
portfolio.
Shareholders who are not U.S. persons for purposes of federal income
taxation should consult with their financial or tax advisors regarding the
applicability of U.S. withholding taxes to distributions received by them from
the Company.
REDEMPTION OF FUND SHARES
Redemptions and exchanges of fund shares are taxable transactions for
federal and state income tax purposes. The tax law generally requires that
shareholders recognize a gain or loss in an amount equal to the difference
between the amount received by the shareholder and the shareholder's tax basis.
If the fund shares are held as a capital asset, the shareholder will realize
capital gain or loss and if the shares have been held for more than one year at
the time of the redemption or exchange, the shareholder will realize long term
gain or loss for federal income tax purposes. Any loss incurred on the
redemption or exchange of shares held for six months or less will be treated as
a long term capital loss to the extent of any long-term capital gains
distributed to the shareholder on those shares. In addition, all or a portion of
any loss realized upon the redemption of fund shares will be disallowed to the
extent the shareholder buys other shares in the fund (through reinvestment of
dividends or otherwise) within 30 days before or after the share redemption.
(Any loss disallowed under this rule will be added to the shareholder's tax
basis in the new fund shares acquired during such period.)
Shareholders of the Tax Free Fund should be careful about redeeming shares
immediately prior to the record date of an exempt-interest dividend because the
redemption may cause the shareholder to realize a taxable gain even though a
portion of the redemption proceeds may represent a pro rata share of tax exempt
interest earned by the fund. In addition, a loss on the sale or redemption of
shares held by the shareholder of the Tax Free Fund for six months or less will
be disallowed to the extent of any exempt-interest dividend received by the
shareholder with respect to those shares.
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<PAGE>
BACKUP WITHHOLDING
The Company may be required to report to the Internal Revenue Service
("IRS") any taxable dividends or other reportable payment (including share
redemption proceeds) and withhold 31% of any such payments made to individuals
and other non-exempt shareholders who have not provided a correct taxpayer
identification number and made certain required certifications that appear in
the account application. A shareholder may also be subject to backup withholding
if the IRS or a broker notifies the Company that the number furnished by the
shareholder is incorrect or that the shareholder is subject to backup
withholding for previous under-reporting of interest or dividend income.
NON-U.S. INVESTORS
Ordinary dividends generally will be subject to U.S. income tax withholding.
The non-U.S. investor's home country may also tax ordinary dividends, capital
gain distributions and gains arising from redemptions and exchanges of fund
shares. Fund shares held by the estate of a non-U.S. investor may be subject to
U.S. estate tax. Non-U.S. investors may wish to contact their tax advisors to
determine the U.S. and non-U.S. tax consequences of an investment in the Funds.
IMPORTANT: The Company reserves the right to (1) refuse to open an account for
any person failing to provide a taxpayer identification number, certified as
correct and (2) close an account by redeeming its shares in full, at the then
current net asset value, upon receipt of notice from the IRS that the taxpayer
identification number certified as correct by the shareholder is in fact
incorrect.
SYSTEMATIC WITHDRAWAL PLAN
As described in the Prospectuses under "Systematic Withdrawal Plan," the
Fund have a Systematic Withdrawal Plan pursuant to which shareholders having an
account value of $5,000 or more ($50,000 or more for Class Y) to automatically
withdraw a minimum of $50 monthly or quarterly. It may not be advisable for
shareholders to maintain a Withdrawal Account while concurrently purchasing
shares of the Government Bond Fund or the Tax Free Fund because of the sales
charge or CDSC (as applicable) involved in additional purchases. A shareholder
should carefully consider such purchases and contact his or her financial
adviser regarding their advisability.
A Systematic Withdrawal Plan provides for regular monthly or quarterly
payments to the account investor or his designee through redemption of a portion
of the shares held in the account. Some portion of each withdrawal may be
taxable gain or loss to the account investor at the time of the withdrawal, the
amount of the gain or loss being determined by the investment in the Fund's
shares. The minimum, though not necessarily recommended, withdrawal amount is
$50. Shares sufficient to provide the designated withdrawal payment are redeemed
each month or quarterly on the 20th, or the next succeeding business day, and
checks are mailed to reach the investor on or about the 1st
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<PAGE>
of the following month. All income dividends and capital gains distributions are
automatically reinvested at net asset value, without sales charge. Since each
withdrawal check represents proceeds from the sale of sufficient shares equal to
the withdrawal, there can be a reduction of invested capital, particularly in a
declining market. If redemptions are consistently in excess of shares added
through reinvestment of distributions, the withdrawals will ultimately exhaust
the capital.
The shareholder may designate withdrawal payments for a fixed dollar amount,
as stated in the preceding paragraph, or a variable dollar amount based on (1)
redemption of a fixed number of shares at monthly or quarterly intervals, or (2)
redemption of a specified and increasing fraction of shares held at monthly or
quarterly intervals. To illustrate the latter option, if an investor wanted
quarterly payments for a ten-year period, the first withdrawal payment would be
the proceeds from redemption of 1/40th of the shares held in the account. The
second payment would be 1/39th of the remaining shares; the third payment would
be 1/38th of the remaining shares, etc. Under this option, all shares would be
redeemed over the ten-year period, and the payment amount would vary each
quarter, depending upon the number of shares redeemed and the redemption price.
No charge is made for a non-qualified Systematic Withdrawal Plan, and the
account investor may change the option or payment amount at any time upon
written request received by SM&R no later than the month prior to the month of a
scheduled redemption for a withdrawal payment. A Systematic Withdrawal Plan may
also be terminated at any time by the account investor or the Fund without
penalty.
Occasionally certain limited types of qualified retirement plans are
involved in making investments and withdrawals during the same year. Under such
an arrangement, it is possible for the plan to be, in effect, charged duplicate
sales charges. In order to eliminate this possibility, each Fund of the Company
will permit additional investments, without sales charge, equal to all sums
withdrawn, providing the additional investments are made during the next twelve
months following the withdrawal or redemption, and providing that all funds
withdrawn were for the specific purpose of satisfying plan benefits of
participants who have retired, become disabled or left the plan. Furthermore,
for a qualified plan to qualify under this provision, the plan must include at
least one participant who is a non-owner employee. The Company and SM&R
discourage shareholders from maintaining a withdrawal account while concurrently
and regularly purchasing shares of the Company although such practice is not
prohibited.
THE UNDERWRITER
SM&R serves as principal underwriter of the shares of all Funds of the
Company pursuant to an Underwriting Agreement dated July 1, 1993, as amended on
November 19, 1998 (the "Underwriting Agreement"). Such Underwriting Agreement
provides that it shall continue in effect only so long as such continuance is
specifically approved at least annually by the Board of Directors of the Company
or by vote of a majority of the outstanding voting securities of a Fund and, in
either case, by the specific approval of a
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<PAGE>
majority of directors who are not parties to such agreement or not "interested"
persons (as defined in the 1940 Act) of any such parties, cast in person at a
meeting called for the purpose of voting on such approval. The Underwriting
Agreement was approved by the Board of Directors of the Company in accordance
with such procedures at a meeting held on August 19, 1999. The Underwriting
Agreement may be terminated without penalty by vote of the Board of Directors or
by vote of the holders of a majority of the outstanding voting securities of the
Company, or by SM&R, upon sixty (60) days' written notice and will automatically
terminate if assigned (as provided in the 1940 Act).
As principal underwriter, SM&R continuously offers and sells shares of each
Fund of the Company through its own sales representatives and broker-dealers. As
compensation for such services, SM&R receives the sales charge, which is the
difference between the offering price at which shares are issued and the net
asset value thereof.
Broker-dealers or other securities dealers that have entered into selling
agreements with SM&R may receive compensation from SM&R or an affiliated company
in connection with selling shares of the SM&R Family of Funds. Compensation may
include financial assistance for conferences, shareholder services, automation,
sales and training programs, or promotional activities. Registered
representatives and their families may be paid for travel expenses, including
lodging, in connection with business meetings or seminars. In some cases, this
compensation may only be available to securities dealers whose representatives
have sold or are expected to sell significant amounts of shares. Securities
dealers may not use certain sales to qualify for this compensation if prohibited
by the laws of any state or self-regulatory agency, such as the National
Association of Securities Dealers, Inc.
The Sales Charge allowance to broker-dealers for those classes with a
front-end sales charge is as follows:
<TABLE>
<CAPTION>
PERCENTAGE CLASS T CLASS A CLASS C
- ---------------------------------------------------------------- ----------- ----------- -----------
<S> <C> <C> <C>
Net Amount Invested
Maximum....................................................... 4.7% 4.9%
Minimum....................................................... 0.0% 0.0%
Public Offering Price
Maximum....................................................... 4.0% 4.25%
Minimum....................................................... 0.0% 0.0%
</TABLE>
For certain large purchases, SM&R intends to pay its representatives and
broker-dealers from its own profits and resources. The amount (expressed as a
per annum percentage of the amount invested) which SM&R might pay such
representatives and broker-dealers is as follows for Class T shares of the
Government Income and Tax Free Funds: Year 1 -- 0.35%; Year 2 -- 0.25% and Year
3 and subsequent years, 0.075% (for each fund). For Primary Fund shares, SM&R
may pay representatives and broker-dealers as follows: Year 1 and Year 2 --
0.10% and Year 3 and subsequent years, 0.075%.
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<PAGE>
The aggregate amount of sales charge received by SM&R for periods ending
August 31st:
<TABLE>
<CAPTION>
1997 1998 1999
---------------- ---------------- ---------
<S> <C> <C> <C>
Total Amount Sales Charge Received.............. $29,337 $30,387 $
Amount Retained by SM&R......................... $3,000 $2,038 $
Amount Reallowed to Dealers..................... Less than $500 Less than $500 $
</TABLE>
CUSTODIAN
The cash and securities of the Company are held by SM&R, 2450 South Shore
Boulevard, Suite 400, League City, Texas, pursuant to a Custodian Agreement
dated July 1, 1993. The Custodian holds and administers the Company's cash and
securities as provided for in such Custodian Agreement. The compensation paid to
the Custodian is paid by the Company and is based upon and varies with the
number, type, and amount of transactions conducted by the Custodian.
SM&R, as custodian, will hold and administer the Company's cash and
securities and maintain certain financial and accounting books and records as
provided for in such Custodian Agreement.
TRANSFER AGENT AND DIVIDEND PAYING AGENT
SM&R, 2450 South Shore Boulevard, Suite 400, League City, Texas, is the
transfer agent and dividend paying agent for the Company pursuant to the
Administrative Agreement. A discussion of SM&R's duties as transfer agent is set
forth above under "Administrative Service Agreement."
COUNSEL
The Company's General Counsel is Greer, Herz & Adams, L.L.P. 18th Floor, One
Moody Plaza, Galveston, Texas 77550.
AUDITORS AND FINANCIAL STATEMENTS
Tait, Weller & Baker ("TWB"), 8 Penn Center, Philadelphia, PA 19103, served
as the Company's independent auditors for the year ending August 31, 1998. Prior
to the year ending August 31, 1998, the Company's financial statements were
audited by KPMG Peat Marwick LLP, 700 Louisiana, Houston, Texas 77002 ("KPMG").
The Board appointed TWB to serve as the independent auditors to the Company
for the year ended August 31, 1997. Shareholders of the Company ratified the
selection of TWB at a meeting of the Shareholders held on May 28, 1998. Due to a
concern over a potential conflict of interest, KPMG resigned as auditors to the
Company on December 15, 1999. For the year ended August 31, 1997, and up to the
date of resignation of KPMG, there were no disagreements with KPMG on any matter
of accounting principles or practices, financial statement disclosure or
auditing scope or procedure which, if not
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<PAGE>
resolved to the satisfaction of KPMG, would have caused it to make reference to
the subject matter of the disagreement in connection with its report. The
independent auditors' report on the 1997 financial statements did not contain an
adverse opinion or a disclaimer of opinion, and was not qualified or modified as
to uncertainty, audit scope or accounting principles. Each of TWB and KPMG has
advised the Company that neither it nor any present member or associate of the
relevant firm has any financial interest, direct or indirect, in the Company.
The Company's audited financial statements for the year ended August 31,
1999, and the Independent Auditors' Report of TWB dated , 1998, are
included herein.
PERFORMANCE AND ADVERTISING DATA
Quotations of performance may from time to time be used in advertisements,
sales literature, shareholder reports or other communications to shareholders or
prospective investors. Each Fund's yield and total return fluctuate in response
to market conditions and other factors. Investment return and principal value
will fluctuate, and shares, when redeemed, may be worth more or less than their
original cost. There can be no assurance that the Money Market Fund will be able
to maintain a stable net asset value of $1.00 per share.
Each Fund's performance may be quoted in advertising in terms of yield or
total return. All advertisements will disclose the maximum sales charge to which
investments in shares of that Fund may be subject. If any advertised performance
data does not reflect the maximum sales charge (if any), such advertisement will
disclose that the sales charge has not been deducted in computing the
performance data, and that, if reflected, the maximum sales charge would reduce
the performance quoted. An investor should keep in mind when reviewing
performance that past performance of a fund is not indicative of future results,
but is an indication of the return to the investor only for the limited
historical period.
With respect to those categories of investors who are permitted to purchase
shares of a Fund at net asset value, sales literature pertaining to the Fund may
quote a current distribution rate, yield, total return, average annual total
return and other measures of performance as described elsewhere in this
Statement of Additional Information with the substitution of net asset value for
the public offering price.
Sales literature referring to the use of the Company or any of its Funds as
a potential investment for Individual Retirement Accounts ("IRAs"), and other
tax-advantaged retirement plans may quote a total return based upon compounding
of dividends on which it is presumed no federal income tax applies.
The Company's annual report contains additional performance information and
will be made available to you upon request and without charge.
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<PAGE>
MONEY MARKET FUND--YIELD
The Money Market Fund will attempt, consistent with safety of principal, to
achieve the highest possible yield from its investments. The Money Market Fund's
yield is its current investment income expressed in annualized terms. Yield
quotations for the Money Market Fund will include an annualized historical
yield, carried at least to the nearest hundredth of one percent, based on a
specific seven-calendar-day period. Yield quotations are calculated by (1)
determining the net change (exclusive of capital changes and income other than
investment income) in the value of a hypothetical pre-existing account having a
balance of one share at the beginning of the period, subtracting a hypothetical
charge reflecting deductions from shareholder accounts, (2) dividing the
difference by the value of the account at the beginning of the base period to
get the base period return, then (3) multiplying the base period return by the
dividend obtained by dividing 365 by 7. The resulting yield figure is carried to
the nearest hundredth of one percent.
The Money Market Fund's effective yield for a specified seven-calendar-day
period is computed by (1) determining the net change (exclusive of capital
changes) in the value of a hypothetical pre-existing account having a balance of
one share at the beginning of the period, (2) subtracting a hypothetical charge
reflecting deductions from shareholder accounts; (3) dividing the difference by
the value of the account at the beginning of the base period to get the base
period return, and then (4) compounding the base period return by adding 1,
raising the sum to a power equal to 365 divided by 7 and subtracting 1 from the
result according to the following formula: EFFECTIVE YIELD = [(BASE PERIOD
RETURN + 1)TO THE POWER OF 356/7]-1. The resulting yield figure is carried to
the nearest hundredth of one percent.
The calculations include (1) the value of additional shares purchased with
dividends declared on the original shares and dividends declared on both the
original shares and any additional shares, and (2) all fees (other than
nonrecurring fees or sales charges) charged to all shareholder accounts, in
proportion to the length of the base period and the Money Market Fund's average
account size. The calculations do not reflect any realized gains or losses from
the sale of securities or any unrealized appreciation or depreciation on
portfolio securities. Income other than investment income is excluded. The yield
computation may be of limited use for comparative purposes as charges at the
account level will decrease the yield. The amount or specific rate of any
nonrecurring sales charge not included in the calculation of yield will be
disclosed.
Current and compounded yields fluctuate daily and will vary with factors
such as interest rates, the quality and length of maturities and the type
investments in the Money Market Fund's portfolio. Neither principal or interest
is insured or guaranteed.
NON-MONEY MARKET FUNDS--YIELD
For the 30-day period ended August 31, 1999, the standardized yield for the
Primary Fund is %. Standardized yield for the Primary Fund is computed by
dividing the Fund's investment income (in accordance with specific standardized
rules) for a given
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<PAGE>
30-day or one month period, net of expenses, by the average number of shares
entitled to receive distributions during the period, dividing this figure by the
Fund's net asset value per share at the end of the period and annualizing the
result (assuming compounding of income in accordance with specific standardized
rules) in order to arrive at an annual percentage rate. The 30-day yield figure
is calculated for each class of each Fund according to a formula prescribed by
the SEC. The formula can be expressed as follows:
Yield = 2[(a-b + 1)TO THE POWER OF 6-1]
------
cd
Where:
a = dividends and interest earned during the period.
b = expenses accrued for the period (net of reimbursement).
c = the average daily number of shares outstanding during the period that
were entitled to receive dividends.
d = the maximum offering price per share on the last day of the period.
For the purpose of determining the interest earned (variable a in the
formula) on debt obligations that were purchased by a Fund at a discount or
premium, the formula generally calls for amortization of the discount or
premium; the amortization schedule will be adjusted monthly to reflect changes
in the market values of the debt obligations.
Investors should recognize that, in periods of declining interest rates, the
yield will tend to be somewhat higher than prevailing market rates, and in
periods of rising interest rates the yield will tend to be somewhat lower. In
addition, when interest rates are falling, moneys received by the Fund from the
continuous sale of its shares will likely be invested in portfolio instruments
producing lower yields than the balance of the Fund's portfolio, thereby
reducing the current yield of the Fund. In periods of rising interest rates, the
opposite result can be expected to occur.
Yield information is useful in reviewing the performance of a Fund, but
because yields fluctuate, this information cannot necessarily be used to compare
an investment in shares of the Fund with bank deposits, savings accounts and
similar investment alternatives that often provide an agreed or guaranteed fixed
yield for a stated period of time. Shareholders of a Fund should remember that
yield is a function of the kind and quality of the instruments in the Fund's
portfolio, portfolio maturity, operating expenses and market conditions.
TOTAL RETURN
Standardized total returns quoted in advertising and sales literature
reflect all aspects of a Fund's return, including the effect of reinvesting
dividends and capital gain distributions, any change in the Fund's net asset
value per share over the period and maximum sales charge, if any, applicable to
purchases of the Fund's shares. A cumulative total return reflects a Fund's
performance over a stated period of time. An average annual total return
reflects the hypothetical annually compounded return that would
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<PAGE>
have produced the same cumulative total return if the Fund's performance had
been constant over the entire period. Because average annual returns tend to
even out variations in a Fund's return, investors should recognize that such
returns are not the same as actual year-by-year results. To illustrate the
components of overall performance, a Fund may separate its cumulative and
average annual returns into income results and capital gain or loss.
The average annual total returns for the Funds for the periods ended August
31, 1998 are:
<TABLE>
<CAPTION>
AVERAGE ANNUAL TOTAL RETURNS
(FOR THE PERIODS ENDING
AUGUST 31, 1999) PAST ONE YEAR PAST 5 YEARS 7-DAY YIELD
- -------------------------------------- ------------- ------------ ------------
<S> <C> <C> <C>
SM&R Government Bond Fund............. % % %
SM&R Primary Fund..................... % % %
SM&R Tax Free Fund.................... % -- --
SM&R Money Market Fund................
</TABLE>
The average annual total return figures for the Funds are computed for a class
according to a formula prescribed by the SEC. The formula can be expressed as
follows:
P(1 + T)TO THE POWER OF n = ERV
Where P = a hypothetical initial payment of $1,000;
T = average annual total return;
n = number of years; and
ERV = Ending Redeemable Value of a hypothetical $1,000
investment made at the beginning of the 1-, 5- or
10-year periods at the end of a 1-, 5- or 10-year
period (or fractional portion thereof), assuming
reinvestment of all dividends and distributions.
The ERV assumes complete redemption of the hypothetical investment at the
end of the measuring period. The ERV assumes the deduction of all nonrecurring
charges deducted at the end of each period.
YIELD AND TOTAL RETURN FIGURES ARE BASED ON HISTORICAL EARNINGS AND ARE NOT
INTENDED TO INDICATE FUTURE PERFORMANCES.
A Fund's performance is a function of its portfolio management in selecting
the type and quality of portfolio securities and is affected by operating
expenses of the Fund and market conditions. A shareholder's investment in a Fund
is not insured or guaranteed. These factors should be carefully considered by
the investor before making any investment in any Fund.
MULTI-CLASS PERFORMANCE
The Multi-Class Funds converted from a single-class to a multi-class
structure. That single class of shares was converted to Class T Shares,
effective December 31, 1998. Existing shareholders as of December 31, 1998
became shareholders in Class T.
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<PAGE>
The performance calculations for the classes of the Multi-Class Funds, other
than the Class T Shares, and any classes that might be created after the Class T
Shares, may be stated so as to include the performance of the Fund's Class T
Shares. For these purposes, the inception of the Class T Shares is the inception
of the Fund. Generally, performance of the Class T Shares will not be restated
to reflect the expenses or expense ratio of another class. For example, the
inception of performance for the Class A Shares will be deemed to be the
inception date of the Class T Shares and the performance of the Class T Shares
(based on the Class T Shares' actual expenses) from the inception of Class T
Shares to the inception of Class A Shares will be deemed to be the performance
of the Class A Shares for that period. For standardized total return
calculations, the current maximum initial sales load Class A Shares would be
used in determining the total return of Class A Shares as if assessed at the
inception of Class T Shares.
PERFORMANCE MEASURES
To help investors better evaluate how an investment in a Fund might satisfy
their investment objective, advertisements and other materials regarding the
Company or any of its Funds may discuss various measures of the Fund's
performance as reported by various financial publications. Materials may also
compare performance (as calculated above) to performance as reported by other
investments, indices, and averages. The following publications, indices, and
averages may be used:
DOW JONES COMPOSITE AVERAGE OR ITS COMPONENT AVERAGES--an unmanaged index
composed of 30 blue-chip industrial corporation stocks (Dow Jones Industrial
Average), 15 utilities company stocks (Dow Jones Utilities Average), and 20
transportation company stocks. Comparisons of performance assume reinvestment of
dividends.
STANDARD & POOR'S 500 STOCK INDEX OR ITS COMPONENT INDICES--an unmanaged
index composed of 400 industrial stocks, 40 financial stocks, 40 utilities
stocks, and 20 transportation stocks. Comparisons of performance assume
reinvestment of dividends.
THE NEW YORK STOCK EXCHANGE COMPOSITE OR COMPONENT INDICES--unmanaged
indices of all industrial, utilities, transportation, and finance stocks listed
on the New York Stock Exchange.
LIPPER--MUTUAL FUND PERFORMANCE ANALYSIS AND LIPPER--FIXED INCOME FUND
PERFORMANCE ANALYSIS--measure total return and average current yield for the
mutual fund industry. Rank individual mutual fund performance over specified
time periods, assuming reinvestment of all distributions, exclusive of any
applicable sales charges.
CDA MUTUAL FUND REPORT, PUBLISHED BY CDA INVESTMENT TECHNOLOGIES,
INC.--analyzes price, current yield, risk, total return, and average rate of
return (average annual compounded growth rate) over specified time periods for
the mutual fund industry.
MUTUAL FUND SOURCE BOOK, PUBLISHED BY MORNINGSTAR, INC.--analyzes price,
yield, risk and total return for equity funds.
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<PAGE>
FINANCIAL PUBLICATIONS: THE WALL STREET JOURNAL AND BUSINESS WEEK, CHANGING
TIMES, FINANCIAL WORLD, FORBES, FORTUNE, AND MONEY MAGAZINES--provide
performance statistics over specified time periods.
CONSUMER PRICE INDEX (OR COST OF LIVING INDEX), PUBLISHED BY THE U.S. BUREAU
OF LABOR STATISTICS--a statistical measure of change, over time, in the price of
goods and services in major expenditure groups.
SALOMON BROTHERS BROAD BOND INDEX OR ITS COMPONENT INDICES--The Aggregate
Bond Index measures yield, price and total return for Treasury, Agency,
Corporate, Mortgage, and Yankee Bonds.
STANDARD & POOR'S BOND INDICES--measures yield and price of Corporate,
Municipal, and Government bonds.
SHEARSON LEHMAN BROTHERS AGGREGATE BOND INDEX OR ITS COMPONENT INDICES--The
Aggregate Bond Index measures yield, price and total return for Treasury,
Agency, Corporate, Mortgage and Yankee Bonds.
SHEARSON LEHMAN BROTHERS MUNICIPAL BOND INDEX (SLMBI) OR ITS COMPONENT
INDICES--SLMBI measures yield, price and total return for the municipal bond
market.
BOND BUYER'S 20-BOND INDEX--an index of municipal bond yields based upon
yields of 20 general obligation bonds maturing in 20 years.
BOND BUYER'S 30-BOND INDEX--an index of municipal bond yields based upon
yields of 20 revenue bonds maturing in 30 years.
HISTORICAL DATA supplied by the research departments of First Boston
Corporation, the J.P. Morgan companies, Salomon Brothers, Merrill, Lynch,
Pierce, Fenner & Smith, Shearson Lehman Hutton and Bloomberg, L.P.
In assessing such comparisons of performance, an investor should keep in
mind that the composition of the investments in the reported indices and
averages is not identical to the portfolio of any Fund, that the averages are
generally unmanaged, and that the items included in the calculations of such
averages may not be identical to the formula used by any Fund to calculate its
figures. In addition there can be no assurance that any series of the Company
will continue this performance as compared to such other averages.
60
<PAGE>
STATEMENTS OF ASSETS AND LIABILITIES August 31, 1998
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
GOVERNMENT PRIMARY TAX FREE
INCOME FUND FUND FUND
SERIES SERIES SERIES
<S> <C> <C> <C>
ASSETS
Investment in securities, at value $ 23,990,119 $ 34,591,101 $ 11,026,401
Cash -- 524,507 --
Prepaid expenses 6,861 8,722 5,524
Receivable for:
Capital stock sold 3,460 105,369 3,552
Interest 207,758 -- 141,218
Expense reimbursement -- 5,603 4,537
Other assets 2,782 2,782 3,212
------------- ------------- -------------
TOTAL ASSETS 24,210,980 35,238,084 11,184,444
------------- ------------- -------------
LIABILITIES
Distribution payable 4,857 2,683 1,072
Capital stock reacquired 11,616 631,909 --
Investment securities purchased 181,023 -- 100,502
Accrued:
Investment advisory fee 10,187 13,989 4,537
Service fee 5,094 6,994 2,269
Other liabilities 16,668 5,627 18,400
------------- ------------- -------------
TOTAL LIABILITIES 229,445 661,202 126,780
------------- ------------- -------------
NET ASSETS $ 23,981,535 $ 34,576,882 $ 11,057,664
------------- ------------- -------------
------------- ------------- -------------
Shares of capital stock outstanding, (6,000,000,000 shares
authorized, $.01 par value per share) 2,262,725 34,582,655 1,038,994
------------- ------------- -------------
------------- ------------- -------------
Net asset value $ 10.60 $ 1.00 $ 10.64
------------- ------------- -------------
------------- ------------- -------------
Offering price per share:
(Net asset value / 95.5%) $ 11.10 $ 11.14
------------- -------------
------------- -------------
Offering price per share $ 1.00
-------------
-------------
</TABLE>
STATEMENTS OF OPERATIONS For Year Ended August 31, 1998
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
GOVERNMENT PRIMARY TAX FREE
INCOME FUND FUND FUND
SERIES SERIES SERIES
<S> <C> <C> <C>
INVESTMENT INCOME
Interest $ 1,696,829 $ 2,049,686 $ 571,797
EXPENSES
Investment advisory fees 120,397 174,328 53,102
Service fees 60,199 87,164 26,551
Professional fees 12,662 12,662 12,661
Custody and transaction fees 13,906 26,284 10,674
Directors' fees 13,405 13,305 13,427
Qualification fees 12,265 19,679 13,381
Shareholder reporting expenses 3,411 3,476 711
Insurance expenses 2,411 2,820 1,880
Other 990 5,519 872
------------- ------------- -------------
TOTAL EXPENSES 239,646 345,237 133,259
LESS EXPENSES REIMBURSED -- (63,359) (53,102)
------------- ------------- -------------
NET EXPENSES 239,646 281,878 80,157
------------- ------------- -------------
INVESTMENT INCOME--NET 1,457,183 1,767,808 491,640
------------- ------------- -------------
REALIZED AND UNREALIZED GAIN (LOSS) ON INVESTMENTS
Net realized gain on investments 103,599 -- 28,603
Change in unrealized appreciation of investments for the period 340,609 -- 363,642
------------- ------------- -------------
NET GAIN ON INVESTMENTS 444,208 -- 392,245
------------- ------------- -------------
NET INCREASE IN NET ASSETS RESULTING FROM OPERATIONS $ 1,901,391 $ 1,767,808 $ 883,885
------------- ------------- -------------
------------- ------------- -------------
</TABLE>
See notes to financial statements.
61
<PAGE>
STATEMENTS OF CHANGES IN NET ASSETS
- --------------------------------------------------------------------------------
GOVERNMENT INCOME FUND SERIES
<TABLE>
<CAPTION>
YEAR ENDED AUGUST 31,
-----------------------------
1998 1997
------------- -------------
<S> <C> <C>
INCREASE IN NET ASSETS FROM OPERATIONS
Investment income--net $ 1,457,183 $ 1,462,594
Net realized gain (loss) on investments 103,599 (2,446)
Change in unrealized appreciation (depreciation) 340,609 562,324
------------- -------------
Net increase in net assets resulting from operations 1,901,391 2,022,472
DISTRIBUTIONS TO SHAREHOLDERS FROM
Investment income--net (1,500,708) (1,419,091)
CAPITAL SHARE TRANSACTIONS--NET (102,449) 1,952,455
------------- -------------
TOTAL INCREASE 298,234 2,555,836
NET ASSETS
Beginning of Year 23,683,301 21,127,465
------------- -------------
End of Year $ 23,981,535 $ 23,683,301
------------- -------------
------------- -------------
</TABLE>
PRIMARY FUND SERIES
<TABLE>
<CAPTION>
YEAR ENDED AUGUST 31,
-----------------------------
1998 1997
------------- -------------
<S> <C> <C>
INCREASE IN NET ASSETS FROM OPERATIONS
Investment income--net $ 1,767,808 $ 1,712,208
DISTRIBUTIONS TO SHAREHOLDERS FROM
Investment income--net (1,767,808) (1,712,208)
CAPITAL SHARE TRANSACTIONS--NET 1,532,007 (4,420,149)
------------- -------------
TOTAL INCREASE (DECREASE) 1,532,007 (4,420,149)
NET ASSETS
Beginning of Year 33,044,875 37,465,024
------------- -------------
End of Year $ 34,576,882 $ 33,044,875
------------- -------------
------------- -------------
</TABLE>
TAX FREE FUND SERIES
<TABLE>
<CAPTION>
YEAR ENDED AUGUST 31,
-----------------------------
1998 1997
------------- -------------
<S> <C> <C>
INCREASE IN NET ASSETS FROM OPERATIONS
Investment income--net $ 491,640 $ 499,113
Net realized gain on investments 28,603 12,803
Change in unrealized appreciation (depreciation) 363,642 314,617
------------- -------------
Net increase in net assets resulting from operations 883,885 826,533
DISTRIBUTIONS TO SHAREHOLDERS FROM
Investment income--net (499,989) (492,984)
CAPITAL SHARE TRANSACTIONS--NET (26,401) 1,218,423
------------- -------------
TOTAL INCREASE 357,495 1,551,972
NET ASSETS
Beginning of Year 10,700,169 9,148,197
------------- -------------
End of Year $ 11,057,664 $ 10,700,169
------------- -------------
------------- -------------
</TABLE>
See notes to financial statements.
62
<PAGE>
FINANCIAL HIGHLIGHTS
- --------------------------------------------------------------------------------
Selected data for a share of capital stock outstanding throughout the period.
GOVERNMENT INCOME FUND SERIES
<TABLE>
<CAPTION>
YEAR ENDED AUGUST 31,
--------------------------------------------------------------------------
1998 1997 1996 1995 1994
---------- ---------- ---------- ---------- ----------
<S> <C> <C> <C> <C> <C>
Net Asset Value, Beginning of Year $ 10.42 $ 10.14 $ 10.51 $ 10.07 $ 10.87
Investment income--net 0.64 0.67 0.65 0.70 0.54
Net realized and unrealized gain
(loss) on investments 0.20 0.26 (0.37) 0.44 (0.79)
---------- ---------- ---------- ---------- ----------
Total from Investment Operations 0.84 0.93 0.28 1.14 (0.25)
Less distributions from
Investment income--net (0.66) (0.65) (0.65) (0.70) (0.55)
---------- ---------- ---------- ---------- ----------
Total Distributions (0.66) (0.65) (0.65) (0.70) (0.55)
---------- ---------- ---------- ---------- ----------
Net Asset Value, End of Year $ 10.60 $ 10.42 $ 10.14 $ 10.51 $ 10.07
---------- ---------- ---------- ---------- ----------
---------- ---------- ---------- ---------- ----------
Total Return 8.31% 9.37% 2.63% 11.85% (2.41)%
---------- ---------- ---------- ---------- ----------
---------- ---------- ---------- ---------- ----------
RATIOS (IN PERCENTAGES)/SUPPLEMENTAL
DATA
Net Assets, end of year (000's
omitted) $ 23,982 $ 23,683 $ 21,127 $ 20,466 $ 19,790
Ratio of expenses to average net
assets 1.00% 1.00%(1) 1.00%(1) 0.70%(1) 1.12%
Ratio of net investment income to
average net assets 6.08% 6.46% 6.17% 6.90% 5.11%
Portfolio turnover rate 32.71% 9.06% 30.17% 2.20% 45.48%
</TABLE>
(1) Expenses for the calculation are net of a reimbursement from Securities
Management & Research, Inc. Without this reimbursement, the ratio of
expenses to average net assets would have been 1.07%, 1.20% and 1.06% for
the years ended August 31, 1997, 1996 and 1995, respectively.
See notes to financial statements.
63
<PAGE>
FINANCIAL HIGHLIGHTS
- --------------------------------------------------------------------------------
Selected data for a share of capital stock outstanding throughout the period.
PRIMARY FUND SERIES
<TABLE>
<CAPTION>
YEAR ENDED AUGUST 31,
--------------------------------------------------------------------------
1998 1997 1996 1995 1994
---------- ---------- ---------- ---------- ----------
<S> <C> <C> <C> <C> <C>
Net Asset Value, Beginning of Year $ 1.00 $ 1.00 $ 1.00 $ 1.00 $ 1.00
Investment income--net 0.05 0.05 0.05 0.05 0.03
---------- ---------- ---------- ---------- ----------
Total from Investment Operations 0.05 0.05 0.05 0.05 0.03
Less distributions from
Investment income--net (0.05) (0.05) (0.05) (0.05) (0.03)
---------- ---------- ---------- ---------- ----------
Total Distributions (0.05) (0.05) (0.05) (0.05) (0.03)
---------- ---------- ---------- ---------- ----------
Net Asset Value, End of Year $ 1.00 $ 1.00 $ 1.00 $ 1.00 $ 1.00
---------- ---------- ---------- ---------- ----------
---------- ---------- ---------- ---------- ----------
Total Return 5.15% 4.98% 5.07% 5.01% 2.91%
---------- ---------- ---------- ---------- ----------
---------- ---------- ---------- ---------- ----------
RATIOS (IN PERCENTAGES)/SUPPLEMENTAL
DATA
Net Assets, end of year (000's
omitted) $ 34,577 $ 33,045 $ 37,465 $ 20,984 $ 15,208
Ratio of expenses to average net
assets (1) 0.80% 0.80% 0.81% 0.84% 0.79%
Ratio of net investment income to
average net assets 5.02% 4.86% 4.93% 4.91% 2.88%
</TABLE>
TAX FREE FUND SERIES
<TABLE>
<CAPTION>
PERIOD
ENDED
YEAR ENDED AUGUST 31, AUGUST 31,
---------------------------------------------------------- ----------
1998 1997 1996 1995 1994
---------- ---------- ---------- ---------- ----------
<S> <C> <C> <C> <C> <C>
Net Asset Value, Beginning of Year $ 10.27 $ 9.93 $ 9.95 $ 9.62 $ 10.00
Investment income--net 0.49 0.51 0.53 0.51 0.24
Net realized and unrealized gain
(loss) on investments 0.37 0.33 (0.02) 0.33 (0.38)
---------- ---------- ---------- ---------- ----------
Total from Investment Operations 0.86 0.84 0.51 0.84 (0.14)
Less distributions from
Investment income--net (0.49) (0.50) (0.53) (0.51) (0.24)
---------- ---------- ---------- ---------- ----------
Total Distributions (0.49) (0.50) (0.53) (0.51) (0.24)
---------- ---------- ---------- ---------- ----------
Net Asset Value, End of Year $ 10.64 $ 10.27 $ 9.93 $ 9.95 $ 9.62
---------- ---------- ---------- ---------- ----------
---------- ---------- ---------- ---------- ----------
Total Return 8.58% 8.61% 5.18% 9.15% (1.49)%**
---------- ---------- ---------- ---------- ----------
---------- ---------- ---------- ---------- ----------
RATIOS (IN PERCENTAGES)/SUPPLEMENTAL
DATA
Net Assets, end of year (000's
omitted) $ 11,058 $ 10,700 $ 9,148 $ 8,399 $ 7,295
Ratio of expenses to average net
assets 0.75%(2) 0.54%(2) --(2) --(2) 1.11%*
Ratio of net investment income to
average net assets 4.60% 4.97% 5.27% 5.43% 2.50%*
Portfolio turnover rate 12.77% 22.15% 18.44% 12.63% 16.49%
</TABLE>
* Ratios annualized
** Returns are not annualized
(1) Expenses for the calculation are net of a reimbursement from Securities
Management & Research, Inc. Without this reimbursement, the ratio of
expenses to average net assets would have been 0.98%, 1.01%, 1.15%, 1.21%
and 1.20% for the years ended August 31, 1998, 1997, 1996, 1995 and 1994,
respectively.
(2) Expenses for the calculation are net of a reimbursement from Securities
Management & Research, Inc. Without this reimbursement, the ratio of
expenses to average net assets would have been 1.25%, 1.27%, 1.18% and 1.25%
for the years ended August 31, 1998, 1997, 1996 and 1995, respectively.
See notes to financial statements.
64
<PAGE>
NOTES TO FINANCIAL STATEMENTS August 31, 1998
- --------------------------------------------------------------------------------
SM&R CAPITAL FUNDS, INC.
NOTE 1--SIGNIFICANT ACCOUNTING POLICIES
The SM&R Capital Funds, Inc. (the "Funds") is a diversified open-end management
investment company registered as a series fund under the Investment Company Act
of 1940, as amended. The Funds are comprised of the American National Government
Income Fund Series ("Government Income Fund Series"), American National Primary
Fund Series ("Primary Fund Series"), and American National Tax Free Fund Series
("Tax Free Fund Series"). Operations commenced March 16, 1992, for the
Government Income Fund Series and Primary Fund Series. The Tax Free Fund Series
began operations September 9, 1993.
The following is a summary of significant accounting policies consistently
followed by the Funds in the preparation of its financial statements. The
preparation of financial statements in conformity with generally accepted
accounting principles requires management to make estimates and assumptions that
affect the reported amounts of assets and liabilities at the date of the
financial statements and the reported amounts of revenues and expenses during
the reporting period. Actual results could differ from those estimates.
SECURITY VALUATION:
Investments in securities are valued based on market quotations or at fair value
as determined by a pricing service approved by the Board of Directors. Prices
provided by the pricing service represent valuations at bid prices or on a basis
determined without exclusive reliance on quoted prices and may reflect
appropriate factors such as institution-size trading in similar groups of
securities, yield quality, coupon rate, maturity, type of issue, individual
trading characteristics and other market data. Securities for which market
quotations are not readily available are valued as determined by the Board of
Directors. Commercial paper is stated at amortized cost, which is equivalent to
value.
SECURITY TRANSACTIONS AND RELATED INVESTMENT INCOME:
Investment transactions are accounted for on the trade date (date order to buy
or sell is executed). Dividend income is recognized on the ex-dividend date, and
interest income is recognized on an accrual basis. Realized gains and losses
from security transactions are reported on the basis of identified cost for
financial reporting and federal income tax purposes.
FEDERAL INCOME TAXES:
For federal income tax purposes, each series is treated as a separate entity.
The Funds intend to comply with requirements of the Internal Revenue Code
relating to regulated investment companies and intend to distribute
substantially all of its taxable income to its shareholders. Therefore, no
provision for federal income taxes is recorded in the accompanying financial
statements. At December 31, 1997, the funds' tax year-end, the Government Income
Fund Series, Primary Fund Series and the Tax Free Fund Series had capital loss
carryforwards that will expire in 2004 of approximately $373,000, $6,000 and
$45,000, respectively.
CAPITAL STOCK TRANSACTIONS AND DISTRIBUTIONS TO SHAREHOLDERS:
Fund shares are sold in a continuous public offering and may be redeemed on any
business day.
AMERICAN NATIONAL GOVERNMENT INCOME FUND SERIES
The Government Income Fund Series invest primarily in the agencies or
instrumentalities of the U.S. Government. Dividends to shareholders from net
investment income are declared and paid monthly.
AMERICAN NATIONAL PRIMARY FUND SERIES
The Primary Fund Series' objective is to seek maximum current income
consistent with capital preservation and liquidity through investment
primarily in commercial paper. All capital stock transactions are made at
net asset value. Distributions are computed daily and distributed monthly.
65
<PAGE>
NOTES TO FINANCIAL STATEMENTS CONTINUED
- --------------------------------------------------------------------------------
SM&R CAPITAL FUNDS, INC.
AMERICAN NATIONAL TAX FREE SERIES
The Tax Free Series' objective is to provide as high a level of income
largely exempt from federal income taxes as is consistent with preservation
of capital through investment of at least 80% of its net assets in
tax-exempt securities during normal market conditions. Dividends to
shareholders from net investment income are declared and paid monthly.
EXPENSES:
Operating expenses not directly attributable to a series' shares are prorated
among the series based on the relative amount of each series' net assets or
shareholders. Organization expenses have been deferred and are being amortized
over a five-year period. All organization expenses for the Tax Free Fund Series
were paid by Securities Management & Research, Inc.
NOTE 2--INVESTMENT ADVISORY AND SERVICE FEES AND OTHER TRANSACTIONS WITH
AFFILIATES
Securities Management & Research, Inc. ("SM&R") is the investment advisor and
principal underwriter for the Funds. Investment advisory fees paid to SM&R are
computed as a percentage of the average daily net assets as follows:
GOVERNMENT INCOME FUND SERIES
TAX FREE FUND SERIES
<TABLE>
<CAPTION>
INVESTMENT
ADVISORY
NET ASSETS FEE
<S> <C>
Not exceeding $100,000,000 0.50%
Exceeding $100,000,000 but not exceeding $300,000,000 0.45%
Exceeding $300,000,000 0.40%
</TABLE>
PRIMARY FUND SERIES
<TABLE>
<S> <C>
All average daily net assets 0.50%
</TABLE>
Administrative fees paid to SM&R by the Funds are computed as a percentage of
average daily net assets as follows:
<TABLE>
<CAPTION>
SERVICE
NET ASSETS FEES
<S> <C>
Not exceeding $100,000,000 0.25%
Exceeding $100,000,000 but not exceeding $200,000,000 0.20%
Exceeding $200,000,000 but not exceeding $300,000,000 0.15%
Exceeding $300,000,000 0.10%
</TABLE>
SM&R has agreed to reimburse the Funds for all expenses, other than taxes,
interest and expenses directly related to the purchase and sale of investment
securities, in excess of 1.25% per annum of the average daily net assets. SM&R
has voluntarily agreed to reimburse the Primary Fund Series for expenses in
excess of 0.80% per annum of average daily net assets and the Government Income
Fund Series for expenses in excess of 1.00% per annum of average daily net
assets for the year ended August 31, 1998.
The Tax Free Fund Series has voluntarily agreed to waive investment advisory
fees leaving the Tax Free Fund responsible for all other expenses.
For the year ended August 31, 1998, SM&R, as principal underwriter, received as
sales charges on sales of shares of capital stock of the Funds as follows:
<TABLE>
<CAPTION>
SALES CHARGES
RECEIVED BY SM&R
<S> <C>
Government Income $ 15,030
Tax Free $ 15,357
</TABLE>
66
<PAGE>
NOTES TO FINANCIAL STATEMENTS CONTINUED
- --------------------------------------------------------------------------------
SM&R CAPITAL FUNDS, INC.
SM&R is a wholly-owned subsidiary of American National Insurance Company
("American National"). As of August 31, 1998, SM&R and American National had the
following ownership in the Funds:
<TABLE>
<CAPTION>
SM&R AMERICAN NATIONAL
------------------------------ ---------------------------------
PERCENT OF SHARES PERCENT OF SHARES
SHARES OUTSTANDING SHARES OUTSTANDING
<S> <C> <C> <C> <C>
Government Income 481,769 21% 660,766 29%
Primary 560,841 2% 15,345,869 44%
Tax Free 125,404 12% 627,022 60%
</TABLE>
NOTE 3--COST, PURCHASES AND SALES OF INVESTMENT SECURITIES
Investments have the same cost for tax and financial statement purposes.
Aggregate purchases and sales of investments in securities, other than
commercial paper, were as follows:
<TABLE>
<CAPTION>
PURCHASES SALES
------------ ------------
<S> <C> <C>
Government Income $ 7,618,884 $ 7,643,966
Tax Free $ 1,300,728 $ 1,375,923
</TABLE>
Gross unrealized appreciation and depreciation as of August 31, 1998, were as
follows:
<TABLE>
<CAPTION>
APPRECIATION DEPRECIATION
------------ ------------
<S> <C> <C>
Government Income $852,256 $11,649
Tax Free $702,775 $0
</TABLE>
NOTE 4--CAPITAL STOCK
GOVERNMENT INCOME FUND SERIES
<TABLE>
<CAPTION>
YEAR ENDED YEAR ENDED
AUGUST 31, 1998 AUGUST 31, 1997
----------------------------- -----------------------------
SHARES AMOUNT SHARES AMOUNT
------------- ------------- ------------- -------------
<S> <C> <C> <C> <C>
Sale of capital shares 107,893 $ 1,143,207 291,016 $ 3,010,920
Investment income dividends reinvested 148,408 1,562,712 127,868 1,322,811
------------- ------------- ------------- -------------
Subtotals 256,301 2,705,919 418,884 4,333,731
Redemptions of capital shares (265,757) (2,808,368) (229,580) (2,381,276)
------------- ------------- ------------- -------------
Net increase (decrease) in capital shares outstanding (9,456) $ (102,449) 189,304 $ 1,952,455
------------- -------------
------------- -------------
Shares outstanding at beginning of year 2,272,181 2,082,877
------------- -------------
Shares outstanding at end of year 2,262,725 2,272,181
------------- -------------
------------- -------------
Net assets as of August 31, 1998 are comprised of the
following:
Capital (par value and additional paid-in) $ 23,410,410
Accumulated net realized loss on investments (269,482)
Net unrealized appreciation of investments 840,607
-------------
Net Assets $ 23,981,535
-------------
-------------
</TABLE>
67
<PAGE>
NOTES TO FINANCIAL STATEMENTS CONTINUED
- --------------------------------------------------------------------------------
SM&R CAPITAL FUNDS, INC.
PRIMARY FUND SERIES
<TABLE>
<CAPTION>
YEAR ENDED YEAR ENDED
AUGUST 31, 1998 AUGUST 31, 1997
----------------------------- -----------------------------
SHARES AMOUNT SHARES AMOUNT
------------- ------------- ------------- -------------
<S> <C> <C> <C> <C>
Sale of capital shares 35,251,969 $ 35,251,969 37,131,503 $ 37,131,503
Investment income dividends reinvested 1,891,922 1,891,922 1,614,059 1,614,059
------------- ------------- ------------- -------------
Subtotals 37,143,891 37,143,891 38,745,562 38,745,562
Redemptions of capital shares (35,611,884) (35,611,884) (43,165,711) (43,165,711)
------------- ------------- ------------- -------------
Net increase (decrease) in capital shares outstanding 1,532,007 $ 1,532,007 (4,420,149) $ (4,420,149)
------------- -------------
------------- -------------
Shares outstanding at beginning of year 33,050,648 37,470,797
------------- -------------
Shares outstanding at end of year 34,582,655 33,050,648
------------- -------------
------------- -------------
Net assets as of August 31, 1998 are comprised of the
following:
Capital (par value and additional paid-in) $ 34,582,637
Accumulated net realized loss on sales of investments (5,755)
-------------
Net Assets $ 34,576,882
-------------
-------------
</TABLE>
TAX FREE FUND SERIES
<TABLE>
<CAPTION>
YEAR ENDED YEAR ENDED
AUGUST 31, 1998 AUGUST 31, 1997
----------------------------- -----------------------------
SHARES AMOUNT SHARES AMOUNT
------------- ------------- ------------- -------------
<S> <C> <C> <C> <C>
Sale of capital shares 59,089 $ 621,304 95,379 $ 964,391
Investment income dividends reinvested 51,288 536,758 47,765 482,300
------------- ------------- ------------- -------------
Subtotals 110,377 1,158,062 143,144 1,446,691
Redemptions of capital shares (113,023) (1,184,463) (22,454) (228,268)
------------- ------------- ------------- -------------
Net increase (decrease) in capital shares outstanding (2,646) $ (26,401) 120,690 $ 1,218,423
------------- -------------
------------- -------------
Shares outstanding at beginning of year 1,041,640 920,950
------------- -------------
Shares outstanding at end of year 1,038,994 1,041,640
------------- -------------
------------- -------------
Net assets as of August 31, 1998 are comprised of the
following:
Capital (par value and additional paid-in) $ 10,376,327
Accumulated net realized loss on sales of investments (21,438)
Net unrealized appreciation of investments 702,775
-------------
Net Assets $ 11,057,664
-------------
-------------
</TABLE>
68
<PAGE>
INDEPENDENT AUDITORS' REPORT
The Board of Directors and Shareholders
SM&R Capital Funds, Inc.
We have audited the accompanying statements of assets and liabilities of SM&R
Capital Funds, Inc. (comprised of Government Income Fund Series, Primary Fund
Series, and Tax Free Fund Series), including the schedule of investments as of
August 31, 1998, the related statements of operations, the statements of changes
in net assets and the financial highlights. These financial statements and
financial highlights are the responsibility of the Fund's management. Our
responsibility is to express an opinion on these financial statements and
financial highlights based on our audits. The statement of changes for the year
ended August 31, 1997 and the financial highlights for each of the four years in
the period ended August 31, 1997 were audited by other auditors whose report
dated October 10, 1997, issued an unqualified opinion.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements and financial
highlights are free of material misstatement. An audit includes examining, on a
test basis, evidence supporting the amounts and disclosures in the financial
statements. Our procedures included confirmation of securities owned as of
August 31, 1998, by correspondence with the custodian. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements and financial highlights referred to
above present fairly, in all material respects, the financial position of SM&R
Capital Funds, Inc. as of August 31, 1998, the results of its operations, the
changes in its net assets and the financial highlights, in conformity with
generally accepted accounting principles.
Tait, Weller & Baker, CPA
Philadelphia, Pennsylvania
October 2, 1998
69
<PAGE>
PART C: OTHER INFORMATION
ITEM 23. EXHIBITS.
(a) 1.a. Registrant's Amended and Restated Articles of Incorporation are
incorporated herein by reference to Exhibit (a)1.a. to
Post-Effective Amendment No. 13 to this form N-1A Registration
Statement.
1.b. Registrant's Articles of Amendment dated December 7, 1998 are
incorporated herein by reference to Exhibit (a)1.b. to
Post-Effective Amendment No. 13 to this form N-1A Registration
Statement.
2. Registrant's Supplementary Articles of Incorporation dated
February 23, 1998, July 21, 1998 and August 6, 1998 are
incorporated herein by reference to Exhibit (a)2. to
Post-Effective Amendment No. 13 to this form N-1A Registration
Statement.
(b) Registrant's By-Laws are incorporated herein by reference to Exhibit 2 to
Post-Effective Amendment No. 7 to this form N-1A Registration Statement.
(c) A specimen of Registrant's stock certificate is incorporated herein by
reference to Exhibit 4 to Post-Effective Amendment No. 7 to this form
N-1A Registration Statement.
(d) 1. Registrant's Investment Advisory Agreement is incorporated herein
by reference to Exhibit 5 to Post-Effective Amendment No. 7 to this
form N-1A Registration Statement.
2. Registrant's Investment Advisory Agreement on behalf of the Money
Market Fund is incorporated herein by reference to Exhibit (d)2. to
Post-Effective Amendment No. 13 to this form N-1A Registration
Statement.
(e) Registrant's Underwriting Agreement is incorporated herein by reference to
Exhibit (e) to Post-Effective Amendment No. 13 to this form N-1A
Registration Statement.
(f) Not Applicable.
(g) 1. Registrant's Custodian Agreement is incorporated herein by
reference to Exhibit 8a to Post-Effective Amendment No. 7 to this
form N-1A Registration Statement.
2. Registrant's Sub-Custodian Agreement is incorporated herein by
reference to Exhibit 8b to Post-Effective Amendment No. 7 to this
form N-1A Registration Statement.
(h) Not Applicable.
(i) Consent and Opinion of Registrant's counsel, Greer, Herz & Adams, L.L.P.,
will be filed by Amendment.
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(j) Consent of Tait, Weller and Baker, independent accountant of Registrant
will be filed by Amendment.
(k) Not Applicable.
(l) Stock Purchase Letters from Securities Management and Research, Inc. and
American National Insurance Company are incorporated herein by reference
to Exhibit 13 to Post-Effective Amendment No. 7 to this form N-1A
Registration Statement.
(m) Registrant's Distribution and Shareholder Servicing Plan is incorporated
herein by reference to Exhibit (m) to Post-Effective Amendment No. 13
to this form N-1A Registration Statement.
(n) Financial Data Schedules will be filed by Amendment.
(o) Registrant's Multiple Class Plan is incorporated herein by reference to
Exhibit (o) to Post-Effective Amendment No. 13 to this form N-1A
Registration Statement.
(p) List of persons controlled by or under common control with Registrant
will be filed by Amendment.
(q) Power of Attorney is incorporated herein by reference to Exhibit 17 to
Post-Effective Amendment No. 10 to this form N-1A Registration Statement.
ITEM 24. PERSONS CONTROLLED BY OR UNDER COMMON CONTROL WITH REGISTRANT.
All persons under common control with Registrant are shown on the list
attached hereto as Exhibit (p).
ITEM 25. INDEMNIFICATION.
The Registrant has agreed to indemnify its directors to the maximum
extent permitted by applicable law against all costs and expenses (including,
but not limited to, counsel fees, amounts of judgments paid, and amounts paid in
settlement) reasonably incurred in connection with the defense of any actual or
threatened claim, action, suit or proceeding, whether civil, criminal,
administrative, or other, in which he or she may be involved by virtue of such
person being or having been such director. Such indemnification is pursuant to
Section 3.15 of the Registrant's By-Laws, a copy of which is attached as Exhibit
2 to Post-Effective Amendment No. 7 to this Form N-1A Registration Statement.
Insofar as indemnification for liability arising under the Securities Act
of 1933 may be permitted to directors, officers and controlling persons of the
registrant pursuant to the foregoing provisions, or otherwise, the registrant
has been advised that in the opinion of the Securities and Exchange Commission
such indemnification is against public policy as expressed in the Act and is,
therefore, unenforceable. In the event that a claim for indemnification against
such liabilities (other than the payment by the registrant of expenses incurred
or paid by a director, officer or
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controlling person of the registrant in the successful defense of any action,
suit or proceeding) is asserted by such director, officer or controlling
person in connection with the securities being registered, the registrant
will, unless in the opinion of its counsel the matter has been settled by
controlling precedent, submit to a court of appropriate jurisdiction the
question whether such indemnification by it is against public policy as
expressed in the Act and will be governed by the final adjudication of such
issue.
ITEM 26. BUSINESS AND OTHER CONNECTIONS OF INVESTMENT ADVISER.
Securities Management and Research, Inc. ("SM&R") serves as investment
adviser to Registrant and SM&R Balanced Fund, Inc., SM&R Growth Fund, Inc., SM&R
Equity Income Fund, Inc. (collectively, the "SM&R Equity Funds") and American
National Investment Accounts, Inc. ("Investment Accounts"). See "The Funds and
Management" in Part A and "MANAGEMENT OF THE COMPANY" and "INVESTMENT ADVISORY
AGREEMENT" in Part B. The address of SM&R is 2450 South Shore Boulevard, Suite
400, League City, Texas 77573.
DIRECTORS AND OFFICERS OF SM&R
ROBERT A. FRUEND, CLU
DIRECTOR OF SM&R
- ---------------------
Director of SM&R; Director of Investment Accounts, One Moody Plaza,
Galveston, Texas; Executive Vice President and Director of Ordinary Agencies of
American National Insurance Company ("American National"), One Moody Plaza,
Galveston, Texas; Director of American National Property and Casualty Company,
1949 East Sunshine, Springfield, Missouri; Director of American National
General Insurance Company, 1949 East Sunshine, Springfield, Missouri; and
Director of American National Insurance Service Company, 1722 South Glenstone,
Springfield, Missouri.
R. EUGENE LUCAS
DIRECTOR AND MEMBER OF EXECUTIVE COMMITTEE OF SM&R
- --------------------------------------------------
Director of American National, One Moody Plaza, Galveston, Texas;
President and Director of Gal-Tex Hotel Corporation, 504 Moody National Bank
Tower, Galveston, Texas, Gal-Tenn Hotel Corporation, 504 Moody National Bank
Tower, Galveston, Texas; Director of ANREM Corporation, One Moody Plaza,
Galveston, Texas.
MICHAEL W. MCCROSKEY
DIRECTOR, PRESIDENT, CHIEF EXECUTIVE OFFICER
AND MEMBER OF THE EXECUTIVE COMMITTEE SM&R
- --------------------------------------------
President and Director of the Registrant; President and Director of
Investment Accounts; President and Director of the SM&R Equity Funds;
Director, Comprehensive Investment Services, Inc., all located at 2450 South
Shore Boulevard, Suite 400, League City, Texas; Executive Vice President,
American National; Director and President, ANREM Corporation; Director and
President, ANTAC Corporation; Assistant Secretary of American National Life
Insurance Company of Texas;
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all located at One Moody Plaza, Galveston, Texas; Vice President, American
National Property and Casualty; Vice President, American National General
Insurance Company; Vice President, Pacific Property and Casualty, Inc., all
located at 1949 East Sunshine, Springfield, Missouri. Vice President of
Standard Life and Accident Insurance Company, 201 Robert S. Kerr Avenue,
Oklahoma City, Oklahoma; Vice President of Garden State Life Insurance
Company, 2450 South Shore Blvd., League City, Texas.
G. RICHARD FERDINANDTSEN
DIRECTOR AND MEMBER OF EXECUTIVE COMMITTEE OF SM&R
- --------------------------------------------------
Director, Senior Executive Vice President and Chief Operating Officer,
American National; Director, Chairman of the Board, President and Chief
Executive Officer, American National Life Insurance Company of Texas, all
located at One Moody Plaza, Galveston, Texas; Director, Comprehensive
Investment Services, 2450 South Shore Boulevard, Suite 400, League City,
Texas; Director, Vice Chairman of the Board, American National General
Insurance Company; Director, Vice Chairman of the Board, American National
Property and Casualty; Director and Vice Chairman of the Board, Pacific
Property & Casualty Company; Underwriter, American National Lloyds Insurance
Company, all located at 1949 East Sunshine, Springfield, Missouri. Director
and Chairman of the Board, Standard Life and Accident Insurance Company, 201
Robert S. Kerr Avenue, Oklahoma City, Oklahoma; Director, Garden State Life
Insurance Company, 2450 South Shore Boulevard, League City, Texas.
RONALD J. WELCH
DIRECTOR OF SM&R
- ----------------
Executive Vice President and Chief Actuary of American National; Senior
Vice President of American National Life Insurance Company of Texas, all located
at One Moody Plaza, Galveston, Texas; Director and Chairman of the Board of
Garden State Life Insurance Company, 2450 South Shore Boulevard, League City,
Texas; Director of Standard Life and Accident Insurance Company, 201 Robert S.
Kerr Avenue, Oklahoma City, Oklahoma; Director of American National Property and
Casualty Company; Director of American National General Insurance Company;
Director of American National Insurance Service Company; Director of Pacific
Property and Casualty Company, all located at 1949 East Sunshine Street,
Springfield, Missouri.
GORDON DIXON
DIRECTOR, SENIOR VICE PRESIDENT, CHIEF INVESTMENT OFFICER AND
MEMBER OF INVESTMENT AND EXECUTIVE COMMITTEES OF SM&R
- -------------------------------------------------------------
Vice President and Portfolio Manager of the Registrant; Vice President,
Portfolio Manager of Growth Portfolio of Investment Accounts; Co-Manager of
the American National Income Fund Inc. and the Managed Portfolio of
Investment Accounts; Director and President, Comprehensive Investment
Services. Each of the foregoing entities is located at 2450 South Shore
Boulevard, Suite 400, League City, Texas. Vice President of Stocks for
American National, One Moody Plaza, Galveston, Texas; Vice President of
Investments for Garden State Life Insurance Company, 2450 South Shore
Boulevard, League
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City, Texas; Former Director of Equity Strategy Research and Trading for
C&S/Sovran Bank (now NationsBank) Atlanta, Georgia.
K. DAVID WHEELER
SENIOR VICE PRESIDENT, INSTITUTIONAL SALES AND PRIVATE CLIENT
SERVICES OF SM&R
- -------------------------------------------------------------
2450 South Shore Boulevard, Suite 400, League City, Texas; Senior
Institutional Consultants, Bank South, Atlanta, Georgia.
EMERSON V. UNGER, C.L.U.
VICE PRESIDENT OF SM&R
- ------------------------
Vice President of the Registrant, the SM&R Equity Funds and Investment
Accounts, each located at 2450 South Shore Boulevard, Suite 400, League City,
Texas.
BRENDA T. KOELEMAY
VICE PRESIDENT AND TREASURER OF SM&R
- ------------------------------------
Vice President and Treasurer of the Registrant, the SM&R Equity Funds,
and Investment Accounts, each located at One Moody Plaza, Galveston, Texas;
Treasurer, Comprehensive Investment Services, also located at 2450 South Shore
Boulevard, Suite 400, League City, Texas.
TERESA E. AXELSON
VICE PRESIDENT AND SECRETARY OF SM&R
- ------------------------------------
Vice President and Secretary of the Registrant, the SM&R Equity Funds,
and Investment Accounts, each located at 2450 South Shore Boulevard, Suite 400,
League City, Texas.
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<PAGE>
ITEM 27. PRINCIPAL UNDERWRITERS.
(a) SM&R serves as the principal underwriter and investment adviser for
the Registrant, the other SM&R Equity Funds, and Investment Accounts. See "The
Funds and Management" in Part A.
(b)
<TABLE>
<CAPTION>
- --------------------------------------------------------------------------------
NAME AND PRINCIPAL POSITIONS AND OFFICES POSITIONS AND OFFICES
BUSINESS ADDRESS WITH UNDERWRITER WITH REGISTRANT
- --------------------------------------------------------------------------------
<S> <C> <C>
Robert A. Fruend, C.L.U. Director None
One Moody Plaza
Galveston, Texas
- --------------------------------------------------------------------------------
R. Eugene Lucas Director None
Moody National Bank Tower
Galveston, Texas
- --------------------------------------------------------------------------------
Michael W. McCroskey Director and President, President and Director
South Shore Boulevard Chief Executive Officer
Suite 400
League City, Texas
- --------------------------------------------------------------------------------
G. Richard Ferdinandtsen Director None
One Moody Plaza
Galveston, Texas
- --------------------------------------------------------------------------------
Ronald J. Welch Director None
One Moody Plaza
Galveston, Texas
- --------------------------------------------------------------------------------
Gordon D. Dixon Director, Senior Vice None
South Shore Boulevard President, Chief
Suite 400 Investment Officer
League City, Texas
- --------------------------------------------------------------------------------
K. David Wheeler Senior Vice President None
South Shore Boulevard Institutional Sales and
Suite 400 Private Client Services
League City, Texas
- --------------------------------------------------------------------------------
</TABLE>
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<TABLE>
<S> <C> <C>
- --------------------------------------------------------------------------------
Emerson V. Unger, C.L.U. Vice President Vice President
South Shore Boulevard
Suite 400
League City, Texas
- --------------------------------------------------------------------------------
Brenda T. Koelemay Vice President and Vice President and
South Shore Boulevard Treasurer Treasurer
Suite 400
League City, Texas
- --------------------------------------------------------------------------------
Teresa E. Axelson Vice President and Vice President and
South Shore Boulevard Secretary Secretary
Suite 400
League City, Texas
- --------------------------------------------------------------------------------
</TABLE>
(c) Not Applicable.
ITEM 28. LOCATION OF ACCOUNTS AND RECORDS.
All accounts, books, and other documents required to be maintained by
Section 31(a) of the Investment Company Act of 1940 and the Rules promulgated
thereunder will be maintained at the office of SM&R at 2450 South Shore
Boulevard, Suite 400, League City, Texas 77573.
ITEM 29. MANAGEMENT SERVICES.
There are no management-related service contracts to which the Registrant
is a party not discussed under Part A or Part B of this Registration Statement.
ITEM 30. UNDERTAKINGS.
TEXAS OPTIONAL RETIREMENT PROGRAM. The Government Income Fund and the
Primary Fund offer shares as investments for custodial accounts that meet the
requirements of Section 403(b)(7) of the Internal Revenue Code of 1986, as
amended (the "Code"), in connection with the Texas Optional Retirement Program
(the "Program"). Under the Program, a custodial account for each participating
employee ("Participant") is established in the name of SM&R. The Program, as
interpreted by the Texas Attorney General, imposes certain restrictions on early
withdrawals from custodial accounts. Section 22(e) prohibits a registered
investment company from suspending a shareholder's right of redemption or
postponing payment on redemption of any redeemable security for more than seven
days after tender of the security.
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<PAGE>
The Staff of the Securities and Exchange Commission took a no-action
position under Section 22(e) of the 1940 Act permitting the Government Income
Fund and the Primary Fund to offer shares in connection with the Program as
contemplated above (See SM&R Capital Funds, pub. avail. Sept. 17, 1992 (the "No-
Action Letter")). The Staff took its position based on the Registrant's
representation that the Funds and SM&R would comply with conditions set forth in
the No-Action Letter. In this regard, each Fund and SM&R has complied with the
following provisions of the No-Action Letter:
(a) Appropriate disclosure regarding the restrictions on redemption
imposed by the Program is included in this Registration Statement
on Form N-1A and the applicable Prospectuses included in this
Registration Statement.
(b) Appropriate disclosure regarding the restrictions on redemption
imposed by the Program is included in any sales literature used in
connection with the offer of the relevant Fund shares to
Participants in connection with the Program.
(c) The Fund and SM&R instruct salespeople who solicit Participants to
purchase Fund shares specifically to bring the restrictions on
redemption imposed by the Program to the attention of the potential
Participants.
(d) The Fund and SM&R obtain from each Participant who purchases Fund
shares in connection with the Program, prior to or at the time of
purchase, a signed statement acknowledging the restrictions on
redemption imposed by the Program.
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<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933 and the
Investment Company Act of 1940, the Registrant, SM&R INVESTMENTS, INC.,
certifies that it meets all of the requirements for effectiveness of this
POST-EFFECTIVE AMENDMENT NO. 14 to this Registration Statement pursuant to Rule
485(a) under the Securities Act of 1933 and has duly caused it to be signed on
its behalf by the undersigned, thereunto duly authorized, in the City of
League City and State of Texas, on the 4th day of October 1999.
SM&R INVESTMENTS, INC.
By: /s/ Michael W. McCroskey
------------------------------------------
Michael W. McCroskey, President
Pursuant to the requirements of the Securities Act of 1933, this
POST-EFFECTIVE AMENDMENT NO. 14 has been signed below by the following persons
in the capacities and on the dates indicated:
PRINCIPAL EXECUTIVE AND PRINCIPAL ACCOUNTING OFFICER:
FINANCIAL OFFICER:
/s/ Michael W. McCroskey /s/ Brenda T. Koelemay
- ----------------------------------- -------------------------------------
Michael W. McCroskey, President Brenda T. Koelemay, Treasurer
Date: October 4, 1999 Date: October 4, 1999
---------------------------- ------------------------------
DIRECTORS
/s/ Ernest S. Barratt, Ph.D. Date: October 4, 1999
- ----------------------------------- -----------------------------
*Ernest S. Barratt, Ph.D.
By: Michael W. McCroskey
/s/ Allan W. Matthews Date: October 4, 1999
- ----------------------------------- -----------------------------
*Allan W. Matthews
By: Michael W. McCroskey
/s/ Lea McLeod Matthews Date: October 4, 1999
- ----------------------------------- -----------------------------
*Lea McLeod Matthews
By: Michael W. McCroskey
/s/ Michael W. McCroskey Date: October 4, 1999
- ----------------------------------- -----------------------------
Michael W. McCroskey
/s/ Ann McLeod Moody Date: October 4, 1999
- ----------------------------------- -----------------------------
*Ann McLeod Moody
By: Michael W. McCroskey
/s/ Edwin K. Nolan Date: October 4, 1999
- ----------------------------------- -----------------------------
*Edwin K. Nolan
By: Michael W. McCroskey
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<PAGE>
/s/ Robert V. Shattuck, Jr. Date: October 4, 1999
- ----------------------------------- -----------------------------
*Robert V. Shattuck, Jr.
By: Michael W. McCroskey
/s/ Jamie G. Williams Date: October 4, 1999
- ----------------------------------- -----------------------------
*Jamie G. Williams
By: Michael W. McCroskey
/s/ Frank P. Williamson Date: October 4, 1999
- ----------------------------------- -----------------------------
*Frank P. Williamson
By: Michael W. McCroskey
* PURSUANT TO A POWER OF ATTORNEY EXECUTED BY THE BOARD OF DIRECTORS DATED
DECEMBER 4, 1997. ATTACHED AS EXHIBIT 99.B17 TO POST-EFFECTIVE AMENDMENT
NO. 10.
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EXHIBIT INDEX
None being filed.
C-11
